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

Author

Listed:
  • Stephen Morris

    (Yale University, Cowles Foundation)

  • Bernardo Guimaraes

    (Yale University, Faculty of Arts & Sciences, Department of Economics (Box 8268))

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.

Suggested Citation

  • Stephen Morris & Bernardo Guimaraes, 2004. "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks," Yale School of Management Working Papers ysm424, Yale School of Management.
  • Handle: RePEc:ysm:somwrk:ysm424
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Currency crisis; sunspots; global games; risk aversion; wealth; portfolio;
    All these keywords.

    JEL classification:

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

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