Ways of Measuring Risk
There are indications that lead to geopolitical crises as well as ways to look out for them.
One method investors use are fear or risk gauges. These tools usually scrape words from press releases, news stations, google searches, etc. that indicate risk in a market. Those words are then quantified for the number of times they are mentioned, and plotted on a chart. A spike in these numbers can indicate risk averse trading or investing.
Figure 1: Geopolitical Risk
Another method does not require the hand of statisticians, but rather volatility measurements. There are some indices out there that traders can access to either gauge market fear or greed in any scenario. The VIX (CBOE Volatility Index) is a helpful tool traders can use to buy or sell on the open market. When the VIX rises, it tends to indicate higher stock market volatility to the downside. The spikes tend to be short term and harsh, so not everyone trades this. Instead, they look at what the VIX is doing to determine if they should be buying or selling stocks, commodities or currency pairs.
Figure 2: The CBOE VIX Index
Impact of Risk on Markets
Higher measurements of risk are not always bearish for every market. It tends to vary on what happened and who it happened to. For instance, when Russia invaded Ukraine, oil supply lines on the border were shut down due to military interactions. This caused oil and the Canadian dollar to skyrocket in 2022 as tensions grew. All while most risk-on pairs went through year-long downtrends.
Risk indices like the VIX saw multiple spikes throughout this same time period while the S&P lost as much as 25% of its value from January 3rd and ended the year 18% below the start of the year.