Risk and Wealth in a Model of Self-Fulfilling Currency Attacks
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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.
Guimarães, Bernardo and Morris, Stephen, "Risk and Wealth in a Model of Self-Fulfilling Currency Attacks" (2003). Cowles Foundation Discussion Papers. 1708.