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

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  • Bannier, Christina E.
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.

Suggested Citation

  • Bannier, Christina E., 2004. "Big elephants in small ponds: Do large traders make financial markets more aggressive?," Volkswirtschaftliche Diskussionsbeiträge 77, University of Kassel, Faculty of Economics and Management.
    • Handle: RePEc:zbw:kasvdb:77
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    References listed on IDEAS

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    Cited by:

    1. Gaëtan Le Quang, 2017. ""Taking Diversity into Account": the Diversity of Financial Institutions and Accounting Regulation," EconomiX Working Papers 2017-10, University of Paris Nanterre, EconomiX.
    2. Cheung, Yin-Wong & Friedman, Daniel, 2009. "Speculative attacks: A laboratory study in continuous time," Journal of International Money and Finance, Elsevier, vol. 28(6), pages 1064-1082, October.
    3. Bjönnes, Geir H. & Holden, Steinar & Rime, Dagfinn & Solheim, Haakon O.Aa., 2005. "'Large' vs. 'Small' Players: A Closer Look at the Dynamics of Speculative Attacks," SIFR Research Report Series 38, Institute for Financial Research.
    4. Li, Mei & Milne, Frank, 2014. "The role of a large trader in a dynamic currency attack model," Journal of Financial Intermediation, Elsevier, vol. 23(4), pages 590-620.
    5. Rocco Caferra & Gabriele Tedeschi & Andrea Morone, 2023. "Agents interaction and price dynamics: evidence from the laboratory," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(2), pages 251-274, April.
    6. Michaelis, Jochen, 2007. "Internationaler Handel," Volkswirtschaftliche Diskussionsbeiträge 91, University of Kassel, Faculty of Economics and Management.
    7. Christina Bannier, 2007. "Heterogeneous multiple bank financing: does it reduce inefficient credit-renegotiation incidences?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(4), pages 445-470, December.
    8. Christian Bauer & Bernhard Herz, 2009. "The Dynamics of Financial Crises and the Risk to Defend the Exchange Rate," Research Papers in Economics 2009-03, University of Trier, Department of Economics.
    9. Eckey, Hans-Friedrich & Kosfeld, Reinhold & Türck, Matthias, 2007. "Anmerkung zur Identifikation von Förderregionen in der Gemeinschaftsaufgabe," Volkswirtschaftliche Diskussionsbeiträge 90, University of Kassel, Faculty of Economics and Management.
    10. Gaëtan Le Quang, 2017. "Taking Diversity into Account: the Diversity of Financial Institutions and Accounting Regulation," Working Papers hal-04141663, HAL.
    11. Fecht, Falko & Wedow, Michael, 2014. "The dark and the bright side of liquidity risks: Evidence from open-end real estate funds in Germany," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 376-399.
    12. Mei Li & Frank Milne, 2007. "The Role Of Large Players In A Dynamic Currency Attack Game," Working Paper 1148, Economics Department, Queen's University.
    13. Lee, Kyounghun & Oh, Frederick Dongchuhl, 2021. "The role of large players in global games with strategic complements and substitutes," Economics Letters, Elsevier, vol. 198(C).
    14. Yunyong Thaicharoen & Sra Chuenchoksan & Ashvin Ahuja, 2007. "Big elephants in small ponds: Risk absorption, risk diversification and management of capital flows," Working Papers 2007-02, Monetary Policy Group, Bank of Thailand.
    15. Aitor Erce, 2012. "Does the IMF´s official support affect sovereign bond maturities?," Working Papers 1231, Banco de España.
    16. Zwart, Sanne, 2007. "The mixed blessing of IMF intervention: Signalling versus liquidity support," Journal of Financial Stability, Elsevier, vol. 3(2), pages 149-174, July.
    17. Taketa, Kenshi & Suzuki-Löffelholz, Kumi & Arikawa, Yasuhiro, 2009. "Experimental analysis on the role of a large speculator in currency crises," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 602-617, October.
    18. Schmidt, André, 2007. "Per-se-Rule, Rule of Reason und der "more economic approach"," Volkswirtschaftliche Diskussionsbeiträge 92, University of Kassel, Faculty of Economics and Management.
    19. Henrich, Károly, 2006. "Kontraktion & Konvergenz: Probleme der nachhaltigkeitsökonomischen Generalisierung eines klimapolitischen Zukunftsmodells," Volkswirtschaftliche Diskussionsbeiträge 83, University of Kassel, Faculty of Economics and Management.
    20. Eckey, Hans-Friedrich & Kosfeld, Reinhold & Türck, Matthias, 2006. "Abgrenzung deutscher Arbeitsmarktregionen," Volkswirtschaftliche Diskussionsbeiträge 81, University of Kassel, Faculty of Economics and Management.
    21. Jerger, Jürgen & Michaelis, Jochen, 2007. "Warum beobachten wir so wenig Arbeitnehmer-Gewinnbeteiligung?," Volkswirtschaftliche Diskussionsbeiträge 94, University of Kassel, Faculty of Economics and Management.
    22. Mei Li & Frank Milne, 2010. "A Large Trader in Bubbles and Crashes: an Application to Currency Attacks," Working Papers 1004, University of Guelph, Department of Economics and Finance.
    23. Tarisa Watanagase, 2007. "Emerging markets in financial globalization: striking the right balance for liberalization," Proceedings, Federal Reserve Bank of San Francisco.
    24. Oh, Frederick Dongchuhl & Park, Junghum, 2023. "A large creditor in contagious liquidity crises," Journal of Banking & Finance, Elsevier, vol. 146(C).
    25. Aitor Erce, 2012. "Does the IMF's official support affect sovereign bonds maturities?," Globalization Institute Working Papers 128, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    currency crises; large traders; market sentiment; coordination; private and public information;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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