Risk and Wealth in a Model of Self-Fulfilling Currency Attacks
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.
Guimarães, Bernardo and Morris, Stephen, "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks" (2003). Cowles Foundation Discussion Papers. 1707.