COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1433R

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

Bernardo Guimarães and Stephen Morris

July 2003
Revised November 2004

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.

Keywords: Currency crisis, global games, risk aversion, wealth, portfolio

JEL Classification: F3, D8