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Risk and Wealth in a Model of Self-Fulfilling Currency Attacks

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  • Bernardo Guimaraes
  • Stephen Morris

Abstract

We analyze the effect of risk aversion, wealth and portfolios on the behavior of investors in a global game model of currency crises with continuous action choices. The model generates a rich set of striking theoretical predictions. For example, risk aversion makes currency crises significantly less likely; increased wealth makes crises more likely; and foreign direct investment (illiquid investments in the target currency) make crises more likely. Our results extend linearly to a heterogeneous agent population.
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  • Bernardo Guimaraes & Stephen Morris, 2006. "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks," Levine's Bibliography 122247000000001115, UCLA Department of Economics.
  • Handle: RePEc:cla:levrem:122247000000001115
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    References listed on IDEAS

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • F3 - International Economics - - International Finance

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