Isaac Baley, professor in the Department of Economics and Business at the UPF, has been awarded with a Marie Skłodowska-Curie Individual Fellowship from the European Union (EU) to carry out a two-year project entitled "Global Policy Uncertainty and International Asset Markets".

In the aftermath of the global financial crisis, it is timely and relevant to deepen our understanding of the relationships between global policy uncertainty and international financial markets. Policy uncertainty has spillover effects beyond national borders, and in an interconnected world economy it becomes a global source of risk. Prof. Baley's Fellowship project will investigate such relationships, linking international finance, asset pricing, and macroeconomics.

Project results will contribute to literature on the consequences of policy uncertainty and international dimensions, aiming to distinguish different layers of policy uncertainty – country-specific, regional, and global – and analyse their differential effects on integrated financial markets. This may, in turn, inform the development of policies that minimise the adverse impacts of uncertainty.

Prof. Baley's approach to the subject is novel by incorporating an international dimension to an asset pricing and portfolio problem with government policy uncertainty. Furthermore, it is also novel in distinguishing and analysing the effects of different layers of policy uncertainty. Prof. Baley will work both independently and with co-authors, with a large part of the research on uncertainty conducted in collaboration with Felix Matthys, Assistant Professor of Finance at the ITAM Business School, Mexico City.

The Fellowship's activities will be divided into two work packages: an empirical component and a theoretical component. In the empirical part, the project will assemble a multi-country panel dataset that combines measures of country-level policy uncertainty with a variety of financial instruments to identify country-level and global uncertainty factors and explore the relationship between uncertainty and asset characteristics, with particular focus to the government's yield curve. In the theoretical part, the project will develop a multi-country general equilibrium asset-pricing model where policy uncertainty – arising from unobserved government actions that affect productivity – becomes a risk factor.

Prof. Baley is also working with Laura Veldkamp and Michael Waugh, both from NYU Stern School of Business, on the project "Might Uncertainty Promote International Trade?". In this work together they explore the impact of uncertainty (for example, uncertainty regarding US trade policies or Brexit) on international trade of goods and services. They find that under certain conditions, uncertainty may actually increase trade as countries are able to share more risk.

You can find out more about Prof. Baley's research via his website.

Watch Prof. Baley present some of his prior work on firm-level uncertainty and the effects of monetary policy (with Julio Blanco from University of Michigan) in this video from the Move 2016 event: