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Insider trading, representativeness heuristic insider, and market regulation

Hong Liu, Lina Qi and Zaili Li

The North American Journal of Economics and Finance, 2019, vol. 47, issue C, 48-64

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.

Keywords: Rational insider; Representativeness heuristic insider; Market maker; Market regulation (search for similar items in EconPapers)
JEL-codes: G14 D82 C72 D43 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:48-64