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 investors, small investors attack the currency when fundamentals are stronger. Yet, the difference can be small, or null, 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.
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Length: 31 pages Date of creation: Aug 2000 Date of revision: Publication status: Published in Review of Economic Studies (2004), 71(1): 87-113 Handle: RePEc:cwl:cwldpp:1273
Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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"When Are Agents Negligible?,"
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[Downloadable!] (restricted)
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Wolfgang Pesendorfer & David Levine, 1992.
"When are Agents Negligible?,"
Discussion Papers
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[Downloadable!]
Carlsson, Hans & van Damme, Eric, 1993.
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Econometrica,
Econometric Society, vol. 61(5), pages 989-1018, September.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.