Speculative Attacks with Multiple Targets

Abstract

This paper examines a global games model of speculative attacks in which speculators
can choose to attack any one of a number of targets. In the canonical global
games model of speculative attacks with a single target, it is well known that there
exists a unique equilibrium that survives iterative deletion of dominated strategies,
characterized by the threshold values of the private signal and the fundamentals.
This paper shows that with two targets, there is again a unique, dominance-solvable
equilibrium. In this equilibrium, the threshold value of signal for attacking a given
currency is a function of the signal for the other target, and the threshold value of
fundamentals that determines the outcome of attack on one currency is a function
of the other target’s fundamentals. Under certain condition on the noise distribution,
the result is shown to extend to environments with any N symmetric targets.
This paper then presents a number of numerical examples and shows, among other
results, that more accurate private signals have a decoupling effect on the outcomes
of attack on different currencies.