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Does one Soros make a difference? A theory of currency crises with large and small traders

Corsetti, Giancarlo, Dasgupta, Amil ORCID: 0000-0001-8474-9470, Morris, Stephen and Shin, Hyun Song (2001) Does one Soros make a difference? A theory of currency crises with large and small traders. Financial Markets Group Discussion Papers (372). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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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 signaling, 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 attach 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 signaling makes the influence of the large trader on small traders behaviour much stronger.

Item Type: Monograph (Discussion Paper)
Official URL: https://www.fmg.ac.uk/
Additional Information: © 2001 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: F - International Economics > F3 - International Finance > F31 - Foreign Exchange
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
Date Deposited: 28 Aug 2009 11:07
Last Modified: 15 Sep 2023 22:50
URI: http://eprints.lse.ac.uk/id/eprint/25045

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