‘Large’ vs. ‘small‘ players: A closer look at the dynamics of speculative attacks

Published in

CESifo Working Paper No. 2518

Abstract

What is the role of "large players" like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are in the rear so as to benefit from a positive interest rate differential. We propose a model that allows the large player to move early, late or both. Using data on currency trading by foreign and local players, where foreign players generally are larger than local, we find that foreign players moved lastb in three attacks on the Norwegian krone (NOK) during the 1990s. After the Russian moratorium in 1998 there was a contemporaneous attack on the Swedish krona (SEK) in which foreign players moved early. Interest rates did not increase in Sweden so there was little to gain by a delayed attack.

By Geir H. Bjønnes, Steinar Holden, Dagfinn Rime and Haakon O. Aa. Solheim
Published Mar. 23, 2015 11:20 AM - Last modified Oct. 6, 2020 10:58 AM