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Risk curves: A methodology to evaluate the risk of fraud by stock price manipulation based on game theory and detection software

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  • Bernardino, Wilton
  • Ospina, Raydonal
  • Souza, Filipe Costa de
  • Rêgo, Leandro
  • Pereira, Felipe

Abstract

Historically, fraudulent episodes result in high losses for investors, layoff of executives, and the erosion of confidence in the stock market, among other negative consequences. In this paper, we established a framework that connects Game Theory and Detection Software to estimate the probability of defrauding by manipulation of stock prices in terms of the effort-damage ratio of the audit team. Furthermore, the method allows to define optimum thresholds values for the score random variable in the detection software's alarm structure. The proposed approach is illustrated by analyzing the financial episode called the plier bubble that occurred in Brazil in 2011. The results reveal a suitable way to quantify the fraud risk probability, thus being a valuable tool to risk management in the stock market.

Suggested Citation

  • Bernardino, Wilton & Ospina, Raydonal & Souza, Filipe Costa de & Rêgo, Leandro & Pereira, Felipe, 2021. "Risk curves: A methodology to evaluate the risk of fraud by stock price manipulation based on game theory and detection software," Journal of Economics and Business, Elsevier, vol. 113(C).
    • Handle: RePEc:eee:jebusi:v:113:y:2021:i:c:s0148619520303970
    DOI: 10.1016/j.jeconbus.2020.105953
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Auditing; Detection software; Fraud risk probability; Game theory; Stock market; ROC curves;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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