A Game Theory Model of Regulatory Response to Insider Trading

Smales, Lee A.; Thul, Matthias

doi:10.2139/ssrn.2191234

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A Game Theory Model of Regulatory Response to Insider Trading

Applied Economics Letters, Forthcoming

15 Pages Posted: 19 Dec 2012 Last revised: 8 Jun 2016

See all articles by Lee A. Smales

Matthias Thul

University of New South Wales (UNSW)

Date Written: December 15, 2012

Abstract

This paper attempts to form a model which can help explain the evolving regulatory regime around insider trading. We develop 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 incentivise traders to engage in illegal transactions. Whilst 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.

Keywords: Regulators, SEC, Insider trading, Game theory, numerical solution, Financial markets

JEL Classification: C70, G18, G00, G28

Suggested Citation: Suggested Citation

Smales, Lee A. and Thul, Matthias, A Game Theory Model of Regulatory Response to Insider Trading (December 15, 2012). Applied Economics Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2191234 or http://dx.doi.org/10.2139/ssrn.2191234