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'Large' vs. 'Small' Players: A Closer Look at the Dynamics of Speculative Attacks

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  • Geir H. Bjønnes
  • Steinar Holden
  • Dagfinn Rime
  • Haakon O. Aa. Solheim

Abstract

What is the role of “large players” like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are in the rear. We propose a model that allows both the large player to move early in order to induce speculation by small players, or wait so as to benefit from a high interest rate prior to the attack. Using data on net positions of “large” (foreigners) and “small” (locals) players, we find that large players moved last in three attacks on the Norwegian krone (nok) during the 1990s: The ERM-crisis of 1992, the NOK-pressure in 1997, and after the Russian moratorium in 1998. In 1998 there was a contemporaneous attack on the Swedish krona (sek) in which large players moved early. Interest rates did not increase in Sweden so there was little to gain by a delayed attack.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2518.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2518

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Keywords: speculative attacks; microstructure; international finance; large players;

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References

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  1. Geir H. Bjønnes & Steinar Holden & Dagfinn Rime & Haakon O.Aa. Solheim, 2005. "“Large” vs. “small” players: A closer look at the dynamics of speculative attacks," Working Paper, Norges Bank 2005/13, Norges Bank.
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Citations

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Cited by:
  1. Ulf Axelson & Per Strömberg & Michael S. Weisbach, 2009. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Journal of Finance, American Finance Association, American Finance Association, vol. 64(4), pages 1549-1582, 08.
  2. Geir H. Bjønnes & Steinar Holden & Dagfinn Rime & Haakon O.Aa. Solheim, 2005. "“Large” vs. “small” players: A closer look at the dynamics of speculative attacks," Working Paper, Norges Bank 2005/13, Norges Bank.
  3. Benjamin E. Hermalin & Michael S. Weisbach, 2012. "Information Disclosure and Corporate Governance," Journal of Finance, American Finance Association, American Finance Association, vol. 67(1), pages 195-234, 02.
  4. Dreber, Anna & Rand, David G. & Garcia, Justin R. & Wernerfelt, Nils & Lum, J. Koji & Zeckhauser, Richard, 2010. "Dopamine and Risk Preferences in Different Domains," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp10-012, Harvard University, John F. Kennedy School of Government.
  5. Fedyk, Yuriy & Walden, Johan, 2007. "High-Speed Natural Selection in Financial Markets with Large State Spaces," SIFR Research Report Series, Institute for Financial Research 52, Institute for Financial Research.
  6. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, Elsevier, vol. 76(2), pages 237-253, December.
  7. Axelson, Ulf & Baliga, Sandeep, 2007. "Liquidity and Manipulation of Executive Compensation Schemes," SIFR Research Report Series, Institute for Financial Research 54, Institute for Financial Research.
  8. Rydqvist, Kristian, 2010. "Tax Arbitrage with Risk and Effort Aversion - Swedish Lottery Bonds 1970-1990," SIFR Research Report Series, Institute for Financial Research 70, Institute for Financial Research.

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