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Full-Text Articles in Social and Behavioral Sciences
Risk And Wealth In A Model Of Self-Fulfilling Currency Attacks, Bernardo Guimarães, Stephen Morris
Risk And Wealth In A Model Of Self-Fulfilling Currency Attacks, Bernardo Guimarães, Stephen Morris
Cowles Foundation Discussion Papers
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.
Risk And Wealth In A Model Of Self-Fulfilling Currency Attacks, Bernardo Guimarães, Stephen Morris
Risk And Wealth In A Model Of Self-Fulfilling Currency Attacks, Bernardo Guimarães, Stephen Morris
Cowles Foundation Discussion Papers
Market participants’ risk attitudes, wealth and portfolio composition influence their positions in a pegged foreign currency and, therefore, may have important effects on the sustainability of currency pegs. We analyze such effects in a global game model of currency crises with continuous action choices. The model, solved in closed form, generates a rich set of theoretical predictions consistent with many popular and academic (unmodelled) speculations about the onset and timing of currency crises. The results extend linearly to a heterogeneous agent population.