CFDP 1433
Risk and Wealth in a Model of Self-Fulfilling Currency Attacks
Author(s):Publication Date: September 2003
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.
Keywords:
Currency crisis, Sunspots, Global games, Risk aversion, Wealth, Portfolio
JEL Classification Codes: F3, D8