Big Elephants in Small Ponds: Do Large Traders Make Financial Markets More Aggressive?
AbstractMarket participants often suspect that large traders have a disproportionate effect on financial markets, increasing the aggressiveness of market responses. Prior studies have shown that the impact of a large trader on a currency crisis depends positively on his "size" and informational position. By contrast, this article highlights the role that market sentiment has on the impact of a large trader. If the market believes that fundamentals are weak, then the probability of a crisis depends positively on the trader’s size but negatively on the precision of his information, with these effects reversed in a generally optimistic market. A large player, therefore, need not make market responses more aggressive.
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Bibliographic InfoPaper provided by University of Kassel, Institute of Economics in its series Discussion Papers in Economics with number 77/05.
Length: 23 pages
Date of creation: Oct 2005
Date of revision:
Publication status: Published in Journal of Monetary Economics, Vol 52 (2005), pp 1517-1531.
currency crises; large traders; market sentiment; coordination; private and public information;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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