Insider trading and government intervention

Abstract

This paper studies an insider trading model with government intervention aiming to stabilize price volatility, in one-period and multi-period scenarios. In a single-period model, we identify a threshold for the strength of government intervention that determines the interplay among market characteristics contingent on whether this threshold is exceeded or not. Furthermore, we find that government intervention effectively stabilizes price fluctuation in the multi-period model. Meanwhile, the insider adopts alternating increasing trading strategies (V-shaped) while the government adopts corresponding hedging strategies. Finally, empirical analysis is used to verify the effectiveness of government intervention.