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A game theory model of regulatory response to insider trading

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Open access
Authors
Smales, Lee
Thul, M.
Date
2016
Type
Journal Article

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Smales, L. and Thul, M. 2016. A game theory model of regulatory response to insider trading. Applied Economics Letters.24 (7): pp. 448-455.
Source Title
Applied Economics Letters
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Department of Finance and Banking
Remarks

This is an Author's Original Manuscript of an article published by Taylor & Francis in Applied Economics Letters on 30/06/2016 available online at <a href="http://www.tandfonline.com/10.1080/13504851.2016.1200179">http://www.tandfonline.com/10.1080/13504851.2016.1200179</a>

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Abstract

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.