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This chapter describes the role that large players play in currency crises and market dynamics, such as hedge funds (HFs). Although multiple equilibrium models elucidate the impacts of a large trader when fundamentals are relatively weak, the global-games model displays that the presence of a large trader may make a difference in economies with relatively strong fundamentals. Price movements away from fundamentals could be linked with large and undesirable real effects such as employment losses and fiscal and monetary imbalances. The net positions of large players are correlated with exchange rates. The disappearance of several large macro HFs after 1998 may be due to the ongoing phase-out of fixed exchange rate regimes. The influences of a large investor on the likelihood of a currency crisis depend on how aggressive its strategy is relative to those of the atomistic investors it replaces.
Keywords: large players; currency crises; market dynamics; hedge funds; multiple equilibrium models; global-games model; exchange rates; price movements
Chapter. 28870 words. Illustrated.
Subjects: International Economics
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