Risk and Wealth in a Model of Self-Fulfilling Currency Attacks
32 Pages Posted: 10 Nov 2004
There are 2 versions of this paper
Risk and Wealth in a Model of Self-Fulfilling Currency Attacks
Date Written: November 2004
Abstract
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.
Note: A previous version of this abstract can be found at http://ssrn.com/abstract=446580
Keywords: Currency crisis, sunspots, global games, risk aversion, wealth, portfolio
JEL Classification: D8, F3
Suggested Citation: Suggested Citation
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