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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
    1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    2. Frankel, David M. & Morris, Stephen & Pauzner, Ady, 2003. "Equilibrium selection in global games with strategic complementarities," Journal of Economic Theory, Elsevier, vol. 108(1), pages 1-44, January.
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    5. Guimaraes, Bernardo & Morris, Stephen, 2007. "Risk and wealth in a model of self-fulfilling currency attacks," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2205-2230, November.
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    More about this item

    Keywords

    Currency crisis; sunspots; global games; risk aversion; wealth; portfolio;

    JEL classification:

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

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