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Big elephants in small ponds: Do large traders make financial markets more aggressive?

Christina Bannier

No 77, Volkswirtschaftliche Diskussionsbeiträge from University of Kassel, Faculty of Economics and Management

Abstract: Market participants often suspect that large traders have a disproportionate effect on financial markets, increasing the aggressiveness of market responses. Prior studies have shown that the impact of a large trader on a currency crisis depends positively on his size and informational position. By contrast, this article highlights the role that market sentiment has on the impact of a large trader. If the market believes that fundamentals are weak, then the probability of a crisis depends positively on the trader's size but negatively on the precision of his information, with these effects reversed in a generally optimistic market. A large player, therefore, need not make market responses more aggressive.

Keywords: currency crises; large traders; market sentiment; coordination; private and public information (search for similar items in EconPapers)
JEL-codes: D82 F31 (search for similar items in EconPapers)
Date: 2004
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