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The Role of Large Players in a Dynamic Currency Attack Game

  • Mei Li


    (Queen's University)

  • Frank Milne


    (Queen's University)

We establish a dynamic currency attack model in the presence of a large player (LP) based on Abreu and Brunnermeier (2003), which differs from most existing one-period static currency attack models. In an attack on a fixed exchange rate regime with a gradually overvaluing currency, both the inability of speculators to synchronize their attack and their incentive to time the collapse of the regime lead to the persistent overvaluation of the currency. We find that the presence of an LP, who is defined as a speculator with more wealth and superior information, can accelerate or delay the collapse of the regime, depending on his incentives to preempt other speculators or to "ride the overvaluation". When an LP's incentive to preempt other speculators is dominant, the presence of an LP will accelerate the collapse of the regime. However, when an LP's incentive to "ride the overvaluation" is dominant, the presence of an LP will delay the collapse of the regime. The latter case provides valuable insights into the role that LP's play in currency attacks: It differs from the usual perception that the presence of LPs will facilitate arbitrage in an asset market and alleviate asset mispricing due to their capability and willingness to arbitrage.

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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1148.

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Length: 24 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:qed:wpaper:1148
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  1. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
  2. Stephen Morris & Hyun S Shin, 2001. "Global Games: Theory and Applications," Levine's Working Paper Archive 122247000000001080, David K. Levine.
  3. Markus K Brunnermeier, 2002. "Bubbles and Crashes," FMG Discussion Papers dp401, Financial Markets Group.
  4. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2004. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 87-113.
  5. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  6. Gara Minguez Afonso, 2006. "Imperfect Common Knowledge in First Generation Models of Currency Crises," FMG Discussion Papers dp555, Financial Markets Group.
  7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  8. Jeanne, Olivier, 1999. "Currency Crises: A Perspective on Recent Theoretical Developments," CEPR Discussion Papers 2170, C.E.P.R. Discussion Papers.
  9. Rochon, Celine, 2006. "Devaluation without common knowledge," Journal of International Economics, Elsevier, vol. 70(2), pages 470-489, December.
  10. Christophe Chamley, 2003. "Dynamic Speculative Attacks," American Economic Review, American Economic Association, vol. 93(3), pages 603-621, June.
  11. Celine Rochon, 2006. "Devaluation without common knowledge," Economics Series Working Papers 2006-FE-03, University of Oxford, Department of Economics.
  12. André Fourçans & Raphaël Franck, 2003. "Currency Crises," Books, Edward Elgar, number 3124, March.
  13. Stephen Morris, . ""Co-operation and Timing''," CARESS Working Papres 95-05, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  14. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2001. "The Role of Large Players in Currency Crises," NBER Working Papers 8303, National Bureau of Economic Research, Inc.
  15. Celine Rochon, 2006. "Devaluation without common knowledge," OFRC Working Papers Series 2006fe03, Oxford Financial Research Centre.
  16. repec:cup:cbooks:9780521578967 is not listed on IDEAS
  17. Bannier, Christina E., 2005. "Big elephants in small ponds: Do large traders make financial markets more aggressive?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1517-1531, November.
  18. repec:cup:cbooks:9780521570176 is not listed on IDEAS
  19. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
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