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Insider Networks

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Listed:
  • Selman Erol
  • Michael Junho Lee

Abstract

Modern-day financial systems are highly complex, with billions of exchanges in information, assets, and funds between individuals and institutions. Though daunting to operationalize, regulating these transmissions may be desirable in some instances. For example, securities regulators aim to protect investors by tracking and punishing insider trading. Recent evidence shows that insiders have formed sophisticated networksthat enable them to pursue activities outside the purview of regulatory oversight. In understanding the cat-and-mouse game between regulators and insiders, a key consideration is the networks that insiders might form in order to circumvent regulation, and how regulators might cope with insiders’ tactics. In this post, we introduce a theoretical framework that considers network formation in response to regulation and review the key insights.

Suggested Citation

  • Selman Erol & Michael Junho Lee, 2020. "Insider Networks," Liberty Street Economics 20200625, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:88224
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    Keywords

    insider trading; money laundering; capital control; transmission networks; regulation;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G1 - Financial Economics - - General Financial Markets

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