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

Bernardo Guimaraes
Yale University - Department of Economics

Stephen Morris
Princeton University - Department of Economics

September 2003

Cowles Foundation Discussion Paper No. 1433

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 Classifications: F3, D8

Working Paper Series

Date posted: September 20, 2003 ; Last revised: September 26, 2003

Suggested Citation

Guimaraes, Bernardo and Morris, Stephen Edward, Risk and Wealth in a Model of Self-Fulfilling Currency Attacks (September 2003). Cowles Foundation Discussion Paper No. 1433. Available at SSRN: http://ssrn.com/abstract=446580

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Contact Information

Stephen Edward Morris (Contact Author) Princeton University - Department of Economics ( email ) Princeton, NJ 08544-1021 United States
Bernardo Guimaraes Yale University - Department of Economics ( email ) New Haven, CT 06520-8264 United States