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Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders

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  • Giancarlo Corsetti
  • Amil Dasgupta
  • Stephen Morris
  • Hyun Song Shin

Abstract

Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals. Even abstracting from signalling, the presence of the large investor does make all other traders more aggressive in their selling. Relative to the case in which there is no large investor, small investors attack the currency when fundamentals are stronger. Yet, the difference can be small, or non-existent, depending on the relative precision of private information of the small and large investors. Adding signalling makes the influence of the large trader on small traders' behaviour much stronger. Copyright The Review of Economic Studies Limited, 2004.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 71 (2004)
Issue (Month): 1 (01)
Pages: 87-113

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Handle: RePEc:bla:restud:v:71:y:2004:i:1:p:87-113

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  1. Carlsson, H. & Damme, E.E.C. van, 1990. "Global games and equilibrium selection," Discussion Paper 1990-52, Tilburg University, Center for Economic Research.
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
  4. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium Selection in Global Games with Strategic Complementarities," Staff General Research Papers 11920, Iowa State University, Department of Economics.
  5. Wolfgang Pesendorfer & David Levine, 1992. "When are Agents Negligible?," Discussion Papers 1018, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
  7. Stephen Morris & Hyun S Shin, 2001. "Global Games: Theory and Applications," Levine's Working Paper Archive 122247000000001080, David K. Levine.
  8. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
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