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

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. r 2005 Elsevier B.V. All rights reserved.