Risk and Wealth in a Model of Self-Fulfilling Currency Attacks

32 Pages Posted: 10 Nov 2004

Multiple version iconThere are 2 versions of this paper

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

Guimaraes, Bernardo and Morris, Stephen Edward, Risk and Wealth in a Model of Self-Fulfilling Currency Attacks (November 2004). Available at SSRN: https://ssrn.com/abstract=618082

Bernardo Guimaraes

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8264
United States

Stephen Edward Morris (Contact Author)

MIT ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://https://economics.mit.edu/faculty/semorris

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