Dynamics of currency crises with asset market frictions

Contagion and Crises Clusters: Toward a Regional Warning System?

“…Beyond this statistical issue, another reason may explain our counterintuitive outcomes. As Guimaraez (2006) points out, due to asset market frictions, currencies were overvalued for a long time before the attack took place. Future work will need to check for the robustness of our results with respect to the period definition used to build this indicator.…”

Coordination, timing and common knowledge

“…Guimaraes (2006) and He and Xiong (2012) consider situations where, like Frankel and Pauzner (2000) and Burdzy, Frankel, and Pauzner (2001), a payo¤ relevant state evolves according to some stochastic process and is publicly observed. In the currency attack model of Guimaraes (2006), investors observe the state of a national economy; in the debt rollover model of He and Xiong (2012), investors observe the state of a company whose debt they hold. A continuum of investors can then switch their action according to a Poisson clock.…”

Defending against Speculative Attacks

“…Krugman (1979), Flood and Garber (1984)) since first generation currency crisis models typically predict that a speculative attack will occur as soon as it is likely to succeed-predicting a negligible depreciation of the exchange rate. There are exceptions, of course: Guimarães (2006) presents a first generation model where the attack is possibly postponed, but this conclusion depends on the presence of frictions on asset markets. Botman and Jager (2002) consider a first generation speculative attack model with two vulnerable countries that cannot be distinguished a priori, so that it takes some time before speculators manage to coordinate.…”