A Game Theory Model of Regulatory Response to Insider Trading

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