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

Steinar Holden, Geir H. Bjønnes, Dagfinn Rime and Haakon O. Aa. Solheim.

Photo: The Scandinavian Journal of Economics

Published in:

Scandinavian Journal of Economics 2014 116 (2) pp. 506-538.

DOI:10.1111/sjoe.12044

Abstract:

What is the role of “large players” (e.g., hedge funds) in speculative attacks? Recent work suggests that large players move early to induce smaller agents to attack. However, many observers argue that large players move late in order to benefit from interest-rate differentials. We propose a model in which large players can do both. Using data on currency trading by foreign (large) and local (small) players, we find that foreign players moved last in three attacks on the Norwegian krone during the 1990s. During the attack on the Swedish krona after the Russian moratorium in 1998, foreign players moved early. Gains by delaying attack were small, however, because interest rates did not increase.

 

Published June 26, 2015 12:07 PM - Last modified June 26, 2015 12:07 PM