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

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Abstract

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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  • Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Shin, Hyun, 2000. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Cowles Foundation Discussion Papers 1273, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1273
    Note: CFP 1088.
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    References listed on IDEAS

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    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.
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    5. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275, Cowles Foundation for Research in Economics, Yale University.
    6. Levine, David K & Pesendorfer, Wolfgang, 1995. "When Are Agents Negligible?," American Economic Review, American Economic Association, vol. 85(5), pages 1160-1170, December.
    7. 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.
    8. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
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    More about this item

    Keywords

    Currency attack; unique equilibrium; speculation;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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