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Insider trading, representativeness heuristic insider, and market regulation

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  • Liu, Hong
  • Qi, Lina
  • Li, Zaili

Abstract

This article develops an insider-trading model with the presence of rational and representativeness heuristic insiders in the market with and without market regulation. We find that, regardless of whether the market regulation exist or not, the heuristic insider trades more aggressively on his information, than the rational insider does, with the result that there is a higher probability for him to earn greater profits. Further, a higher heuristic bias of the heuristic insider leads to lower expected profit for rational insider, but higher expected profits for the heuristic insider. Moreover, the heuristic insider and rational insider prefer to trade less aggressively on their information when there is market regulation, but, they are likely to get more ex-ante expected profit. Furthermore, we find that the price efficiency and market stability may all be sacrificed if insider trading is regulated.

Suggested Citation

  • Liu, Hong & Qi, Lina & Li, Zaili, 2019. "Insider trading, representativeness heuristic insider, and market regulation," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 48-64.
    • Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:48-64
    DOI: 10.1016/j.najef.2018.11.011
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    References listed on IDEAS

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    More about this item

    Keywords

    Rational insider; Representativeness heuristic insider; Market maker; Market regulation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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