A game theory model of regulatory response to insider trading

We develop a model which can help in explaining the evolving regulatory regime around insider trading. We form a simple sequential game-theoretical model of insider trading transactions and, utilizing Monte Carlo simulation to determine equilibrium, we show that costly investigations and low penalti...

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Bibliographic Details
Published in:Applied economics letters 2017-04, Vol.24 (7), p.448-455
Main Authors: Smales, L.A., Thul, Matthius
Format: Article
Language:English
Subjects:
Economic analysis
financial market regulation
Game theory
game theory model
Insider dealing
Insider trading
Monte Carlo simulation
Regulation of financial institutions
Securities and Exchange Commission (SEC)
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Summary:We develop a model which can help in explaining the evolving regulatory regime around insider trading. We form a simple sequential game-theoretical model of insider trading transactions and, utilizing Monte Carlo simulation to determine equilibrium, we show that costly investigations and low penalties incentivize traders to engage in illegal transactions. While the model helps to explain stiffer action by regulatory bodies, the question remains as to whether the elevated penalty levels are sufficient to prevent further insider trading.
ISSN:1350-4851
1466-4291
DOI:10.1080/13504851.2016.1200179