Board of Governors of the Federal Reserve System

Figure 1. GRP Sentiment Over Time

Figure 1 is a two-chart panel. The figure on the left displays the overall sentiment index $$(\overline{Sentiment_t})$$, and its decomposition into positive and negative sentiment. The figure on the right plots industry-specific sentiment over time for three select industries: Agriculture, Aircraft, and Rubber and Plastic products. The x axis on both charts spans from 2002:Q1 to 2024:Q3, and the data are quarterly. The lines on the leftmost chart are expressed as a percent of total wordcount, and the y axis spans -0.10 to 0.04. Industry sentiment on the righthand chart is expressed as deviation from mean ($$\overline{Sentiment_t})$$ in each quarter (multiplied by 100 for readability), and the y axis ranges from -0.2 to 0.1. There is a single dot for each industry that corresponds to the quarter in which the magnitude of deviation was the largest.

The plot on the left shows that positive sentiment tended to be a lower magnitude than negative sentiment for the duration of the time series. All three lines remained near zero for most of the sample, spiking during quarters following major geopolitical events (e.g., the Iraq War, Russia’s invasion of Ukraine, and the beginning of the Israel/Hamas conflict).

The plot on the left shows heterogeneity in sentiment over time by industry. Sentiment for aircraft tends to be the most negative for the duration of the sample, while sentiment for Agriculture is generally positive. Sentiment for Rubber and Plastic Products remains negative for most of the quarters shown but is generally less volatile than Aircraft sentiment. All three industries experienced their largest deviations around the end of 2022 or beginning of 2023.

Return to text

Figure 2. Time-Invariant GPR Sentiment by Industry

Figure 2 is a horizontal bar chart displaying the time-invariant GPR sentiment $$(IndustrySentiment_i)$$ for the 43 industries. The x-axis represents the industry's average deviation from the mean, multiplied by 100 for readability, and ranges from -0.03 to 0.02. The y-axis lists the industries, ordered from the most negative to the most positive sentiment deviation. Each industry is represented by a blue bar extending either to the left (negative sentiment) or right (positive sentiment) of the zero line.

The chart illustrates the heterogeneity in sentiment-based exposures across industries. The industries with the most negative sentiment are Aircraft, Construction Materials, and Fabricated Products. The industries with the most positive sentiment are Agriculture, Healthcare, and Utilities.

Return to text

Figure 3. Log Changes in the Caldara-Iacoviello (2022) GPR Index

Figure 3 plots the the Caldara and Iacoviello (2022) geopolitical risk index, expressed in log-changes. The data are observed at a daily frequency. The y axis ranges from -4 to 4. The x axis ranges from 2000 to 2024. There is a horizontal blue dashed line that shows the 99th percentile of the log-change of GPR. There are 63 blue dots that correspond to days during which the one-day log change in GPR was at or above the dashed blue line (which we refer to as “spikes” in the note). There are four vertical black lines that align with 4 spikes in the index and each correspond to a notable geopolitical event. The events are identified as “9/11 attacks” in September 2001, “London Bombings” in July 2005, “Paris attacks” in November 2015, and “Hamas-Israel conflict” in October 2023.

Return to text

Figure 4. GPR Stock Price Sensitivity, by Industry

Figure 4 is a horizontal bar chart displaying the beta coefficient for each industry that measures the sensitivity of its stock price to changes to the geopolitical risk index on spike days. The x axis represents the sensitivity and ranges from -0.05 to 0.05. The y axis lists each of the 43 industries, ordered from the most negative to the most positive beta coefficient. Each industry is represented by a light blue bar extending either to the left (negative sentiment) or right (positive sentiment) of the zero line.

The chart illustrates the heterogeneity in stock price sensitivity to GPR across industries. The industries with the most negative sentiment are Aircraft, Transportation, and Real Estate. The industries with the most positive sentiment are Agriculture, Electrical Equipment, and Pharmaceutical Products.

Return to text

Figure 5. Correlation between GPR Sentiment and GPR Stock Price Sensitivity, by Industry

Figure 5 is a scatterplot that displays the correlation between the two measures of industry-exposure to GPR. There is one black dot for each of the 43 industries in our analysis. The sentiment measure is on the x axis and is expressed in deviation from average sentiment, multiplied by 100. The x axis ranges from -0.025 to 0.01. The y axis displays the beta coefficients for industry, which measures the sensitivity of excess returns to changes in GPR on spikes days for each industry. The range of the y axis is -0.04 to 0.03. There is a dashed black horizontal line at y = 0 and a dashed black vertical line at x = 0. There is an upward sloping line of best fit, which has a label noting that the correlation coefficient is 0.48.

4 industries are labeled on the plot: Consumer Discretionary, Real Estate, Automobiles and Trucks, and Other. These are the industries that have the largest differences between their values when we normalize and compare the exposure indexes. The imperfect alignment between the indexes suggests that each measure picks up different information.

Return to text