The Role of Large Players in Currency Crises

During recent episodes of financial turmoil some policy makers voiced concerns about aggressive, and possibly manipulative, practices by highly leveraged institutions in emerging markets. This paper addresses these concerns by reconsidering in detail, at both theoretical and empirical levels, the role of large players in currency crises. The first part of the study discusses analytical results from different models of speculative attack, suggesting that the presence of agents with market power can increase a country's vulnerability to a crisis and make other investors more aggressive in their position-taking. Both size and reputation for quality of information matter in determining large players' impact on the market. The second part of the study presents evidence on the correlation between exchange rate movements and major market participants' net currency positions, and delves into a comparative analysis of several recent crisis episodes in Thailand, Hong Kong, Malaysia, Australia, and South Africa in light of the previous theoretical results.