Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 38: 'Large' vs. 'Small' Players: A Closer Look at the Dynamics of Speculative Attacks

Geir H. Bjönnes (), Steinar Holden (), Dagfinn Rime () and Haakon O.Aa. Solheim ()
Additional contact information
Geir H. Bjönnes: Norwegian School of Management (BI)
Steinar Holden: University of Oslo and Norges Bank
Dagfinn Rime: Norges Bank (Central Bank of Norway), Postal: P O Box 1179 Sentrum, 0107 Oslo, Norway
Haakon O.Aa. Solheim: Ministry of Trade and Industry

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. We propose a model that allows both the large player to move early in order to induce speculation by small players, or wait so as to benefit from a high interest rate prior to the attack. Using data on net positions of "large" (foreigners) and "small" (locals) players, we find that large players moved last in three attacks on the Norwegian krone (NOK) during the 1990s: The ERM-crisis of 1992, the NoK-pressure in 1997, and after the Russian moratorium in 1998. In 1998 there was a contemporaneous attack on the Swedish krona (SEK) in which large players moved early. Interest rates did not increase in Sweden so there was little to gain by a delayed attack.

Keywords: Speculative attacks; Microstructure; International finance; Large players

JEL-codes: F31; F41; G15

27 pages, December 15, 2005

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