Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders

TLDR

The study asks whether a single large investor heightens a country's susceptibility to speculative currency attacks. The authors construct a model in which a single large investor and a continuum of small investors independently choose to attack a currency based on private information about fundamentals. The model shows that a large investor makes other traders more aggressive, causing small investors to attack only when fundamentals are stronger, but the effect can be negligible or absent depending on information precision, and becomes much stronger when signaling is present.

Abstract

Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals. Even abstracting from signaling, the presence of the large investor does make all other traders more aggressive in their selling. Relative to the case in which there is no large investors, small investors attach the currency when fundamentals are stronger. Yet, the difference can be small, or null, depending on the relative precision of private information of the small and large investors. Adding signaling makes the influence of the large trader on small traders behaviour much stronger.