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

By Giancarlo Corsetti, Amil Dasgupta, Stephen Morris and Hyun Song Shin

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

Topics: HG Finance, HB Economic Theory
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2001
OAI identifier: oai:eprints.lse.ac.uk:25045
Provided by: LSE Research Online

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