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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

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

Journal of Economics and Business, 2021, vol. 113, issue C

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.

Keywords: Auditing; Detection software; Fraud risk probability; Game theory; Stock market; ROC curves (search for similar items in EconPapers)
JEL-codes: C57 C58 D44 D81 M40 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jeconbus.2020.105953

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