Title

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

Document Type

Discussion Paper

Publication Date

9-1-2003

CFDP Number

1433

CFDP Pages

25

Abstract

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.

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