COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1434

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

Bernardo Guimaraes and Stephen Morris

September 2003

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: F3, D8