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Index of Geopolitical Risk from North Korea

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We are pleased to host a new index of geopolitical risk in the inter-Korean relationship developed by Seungho Jung, Jongmin Lee, and Seohyun Lee. In their paper on "The Impact of Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics," they construct a monthly index of Geopolitical Risk from North Korea (GPRNK index) using articles published in 18 Korean newspaper and broadcast outlets. They follow the index construction methods in "Measuring Economic Policy Uncertainty" by Scott R. Baker, Nicholas Bloom and Steven J. Davis and in "Measuring Geopolitical Risk" by Dario Caldara and Matteo Iacoviello.

To construct their index, Jung, Lee and Lee proceed as follows: First, they identify articles that contain "North Korea" in the following media outlets: Chosun Ilbo, Dong-a Ilbo, Joong-ang Ilbo, Kyunghyang Shinmun, Kookmin Ilbo, Munhwa Ilbo, Seoul Shinmun, Segye Ilbo, Hankyoreh, Hankook Ilbo, Maeil Business Newspaper, Money Today, Seoul Gyeongje, Hankook Gyeongju, Herald Economy, KBS, MBC and SBS.

Second, within the set of articles selected by the first step, they flag articles that mention four types of geopolitical risk as follows:

  • Military Tensions: Articles that contain {nuclear or missile or military or war} and {threat or tension or provocation}, excluding articles that contain {peace}.

  • Sanctions: Articles that contain {sanction or pressure} and {refute or dissent or criticize}.

  • Talks & Agreements: Articles that contain {talks or dialogue} and {resume or agreement or negotiation}, excluding articles that contain {fail or break or boycott}.

  • Economic Cooperation: {"economic cooperation" or its abbreviations} and {progress or expectation}, excluding articles that contain {concern}.

Third, they compute the frequency of news articles (N_(j,it)) for each risk type j=1,2,3,4, outlet i, and month t. They then compute the frequency of negative geopolitical risk articles as N_(neg,it)= N_(1,it)+N_(2,it) (Military Tensions + Sanctions) and the frequency of positive geopolitical risk articles as N_(pos,it)= N_(3,it)+N_(4,it) (Talks & Agreements + Economic Cooperation).

Fourth, they consider the relative net frequency of negative articles as X_it= (N_(neg,it)-N_(pos,it) )/N_(All,it), where N_(All,it) is the total number of articles published in outlet i and month t. They transform this net frequency count to have positive values, given by:

Finally, they standardize this value by dividing through by its time-series standard deviation from January 1995 to December 2016. They average this standardized outlet-level index across outlets by month to obtain their geopolitical risk index, which they multiplicatively rescale to a mean value of 100 from January 1995 to December 2016.

Their dataset should be cited as: Jung S., Lee J. and Lee S. (2021). The Impact of Geopolitical Risk on Stock Returns: Evidence from Inter-Korea Geopolitics. IMF Working Paper No. 2021 /251.