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

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

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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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. repec:ner:tilbur:urn:nbn:nl:ui:12-154416 is not listed on IDEAS
  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. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  4. Stephen Morris & Hyun S Shin, 2001. "Global Games: Theory and Applications," Levine's Working Paper Archive 122247000000001080, David K. Levine.
  5. David M. Frankel & Stephen Morris & Ady Pauzner, 2001. "Equilibrium Selection in Global Games with Strategic Complementarities," Cowles Foundation Discussion Papers 1336, Cowles Foundation for Research in Economics, Yale University.
  6. Carlsson, H. & van Damme, E.E.C., 1993. "Global games and equilibrium selection," Other publications TiSEM 49a54f00-dcec-4fc1-9488-4, School of Economics and Management.
  7. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  8. David K. Levine & Wolfgang Pesendorfer, 1995. "When Are Agents Negligible?," Levine's Working Paper Archive 96, David K. Levine.
  9. 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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