E-encyclopedia of banking, stock exchange and finance

Selected letter: O


    His story is the American story - values from the heartland, a middle-class upbringing in a strong family, hard work and education as the means of getting ahead, and the conviction that a life so blessed should be lived in service to others.

    With a father from Kenya and a mother from Kansas, President Obama was born in Hawaii on August 4, 1961. He was raised with help from his grandfather, who served in Patton's army, and his grandmother, who worked her way up from the secretarial pool to middle management at a bank.

    After working his way through college with the help of scholarships and student loans, President Obama moved to Chicago, where he worked with a group of churches to help rebuild communities devastated by the closure of local steel plants.

    He went on to attend law school, where he became the first African-American president of the Harvard Law Review. Upon graduation, he returned to Chicago to help lead a voter registration drive, teach constitutional law at the University of Chicago, and remain active in his community.

    President Obama's years of public service are based around his unwavering belief in the ability to unite people around a politics of purpose. In the Illinois State Senate, he passed the first major ethics reform in 25 years, cut taxes for working families, and expanded health care for children and their parents. As a United States Senator, he reached across the aisle to pass groundbreaking lobbying reform, lock up the world's most dangerous weapons, and bring transparency to government by putting federal spending online.

    He was elected the 44th President of the United States on November 4, 2008, and sworn in on January 20, 2009. He has been ri-elected in Nov. 2012.

    He and his wife, Michelle, are the proud parents of two daughters, Malia, 14, and Sasha, 11.


    (Official) Exchange trading is the structured manner in which assets are exchanged on the market between investors.
    Stringent rules that regulate trading are the basic characteristic of this modality. Each parameter is defined in advance by each stock exchange in question and by the Institutions, that, in a broad sense, supervise the exchange. An example of standardised exchange in the (Official) Exchange is the futures contract. The stock exchange is the physical site where regulated exchanges take place, which differs from Over-the-Counter (OTC) trading, which can be held on any other platform. In Italy, the official stock exchange is Borsa Italiana S.p.A.. Nowadays, stock exchanges themselves are listed on their own stock market. Borsa Italiana S.p.A. offers post-settlement services offered by Cassa di Compensazione e Garanzia S.p.A. and by Monte Titoli S.p.A. with fair, transparent and non-discriminatory rules. These services are given on the basis of interoperability, security, and equal treatment between market infrastructures and individual or institutions that request them and who are entitled according to the current national and/or European regulations.
    Ciciretti, R., Trenta, U., 2006, La Borsa Europea. Una Visione d’Insieme, in Rapporto sul Sistema Finanziario Italiano 2006, ARACNE, Roma;
    Editor: Rocco CICIRETTI
    © 2009 ASSONEBB


    Offshoring means having the outsourced business functions done in another country, in order to reduce labor expenses. Other times, the reasons for offshoring are strategic: to enter new markets, to tap talent currently unavailable domestically or to overcome regulations that prevent specific activities domestically. The term is in use in several distinct but closely related ways. It is sometimes used broadly to include substitution of a service from any foreign source for a service formerly produced internally to the firm. In other cases, only imported services from subsidiaries or other closely related suppliers are included.

    After its accession to the World Trade Organization (WTO) in 2001, the People's Republic of China (PRC) emerged as a prominent destination for production offshoring. Another focus areas has been India and Romania. The technical progress and reduction of transport cost (see Globalization: economy, finance and regulation) improved the possibilities of offshoring.

    Editor: Giovanni AVERSA


    The macroeconomics of oil price shocks has been one of the most discussed issue in the extensive literature of energy economics since the mid-seventies, when the 1973-74 oil shock increased the debate concerning the oil economy as never before. In this regard, several areas of investigation about oil and economic performances have emerged as important subjects of research. If immediately after a price shock, researchers were investigating whether the higher price of oil might be a permanent feature of a changed natural resource regime, on the other side researchers were also exploring how the economy should adjust to the new international oil context generated by sudden oil supply shocks. As underscored above, increasing attention to these dynamics emerged during the mid-seventies when, in particular, the oil price shock of 1973 and subsequently of 1979 were pointed out as the principal reasons of lower U.S macroeconomic performances after the shocks. The oil shock impact on economic growth depends on several factors partially linked:
    (i) the shock size (measured by the price change in percentage terms);
    (ii) the shock’s persistence (for how long the shock lasts on the financial markets);
    (iii) the economic dependency on oil and energy (if the economy is more or less energy intensive);
    (iv) the policy-makers’ strategic decisions (if the monetary and fiscal policies implemented to reduce the oil shock impact will have the effect of reducing the negative consequences of the shock itself).
    In this context, this brief essay will provide some key-contributes with the aim to shed light on this diverse and somewhat fragmented framework on the oil price effect on the economy.
    The literature on the relationship between oil shocks and macroeconomics can be divided into two broad strands: the first examines the relationship between energy prices, economic activity and the direct effects of oil price increases on the aggregate output (Hamilton 1983, 1985, 1988, 1996, 2003, 2005; Kilian 2005; Rogoff 2006; Rotemberg and Woodford 1996); the second analyses the direct and indirect effects arising from central bank policy responses to the inflation caused by oil price increases (Bohi 1989, Bernanke et al 1997, Hamilton and Herrera (2004)). However, despite the considerable amount of literature on the topic, the origins and causes of oil shocks remain an area of continuous discussion both by the supply side (the shocks of 1973, 1979, 1980 and 1990 have commonly been included in the supply side shocks category) and the demand side (the shock of 2007-2008, principally driven by the increasing energy demand from emerging economies such as India and China, see table 1.).

    Table 1: World Supply-Demand Balance for Oil in 1990 (a) and 2010 (b)

    Source: Dicembrino, C., Scandizzo, P.L., “The Deterministic and Speculative Component of the Oil Spot Price: A Real Option Value Approach, 2011. Paper presented at the Energy and Finance Conference, School of Economics, Erasmus Rotterdam University, 5-6 October 2011.

    Analysing the U.S. output growth between 1948 and 1980, Hooker (1996) has illustrated that a 0.6% decrease of GDP growth has been due to a 10% increase in oil prices, con?rming Hamilton’s results over the period between 1948 and 1972. Furthermore, Hamilton (1983) calculated with a similar data set (from 1949 to 1980) that a 10% increase in oil prices will result later in a reduced level of U.S. GDP growth (approximately he estimated a 1.4% of GDP) as compared to GDP levels without oil price increases. Rotemberg and Woodford (1996) estimated for the same lapse of time, a U.S. GDP decrease of 2.5% caused by the spike of 10% in oil prices. Lee et al. (1997) argued that this abrupt and unexpected oil price growth has had a highly significant and asymmetric impact on output. Mory (1993) showed that increases and decreases in real oil prices have asymmetric effects on output and other macroeconomic variables between 1951 and 1990, and important effects on personal income and earnings in many industries from 1959 to 1989.
    Ferderer (1996) found evidence that conservative monetary policy in response to oil price increases might affect domestic output; moreover, he found that central bank decisions cannot explain alone the oil price shock effects on real GDP. Barsky and Kilian (2002, 2004) investigated the idea of considering oil price shocks as a direct contributor to macroeconomic fluctuations since 1970. They reviewed the most important oil price shocks, in particular the 1990-91 Gulf War and the 2001 boom in oil prices, by arguing that, despite the fact that these episodes might seem similar, in reality they are very different (Figure 1).

    Figure 1: Oil price behaviour (1965-2011) and the most important oil-shock since the World War II

    Source: Author elaborations on BP database. $US per barrel, 2010 prices.

    In this context, Hooker (1996) analysed the dramatic crude oil increases during the 1980s, finding evidence that increases in oil prices have significantly impacted the economy, while the price decline effects during the same lapse of time have had a smaller impact and have been more difficult to model. As it has already been mentioned above, Hamilton (1983), by examining a data set from 1948 to 1980, found that oil price variation has a strong casual and negative correlation with the real U.S. GNP growth. Following the Hamilton paper (1983), Mork (1989) showed that, by extending the sample to 1988, the correlation becomes only marginally significant and that there are asymmetric effects between oil price fluctuations and GDP growth. Furthermore, he found a negative correlation with oil price increases and a statistically scarce significant correlation with oil price decreases. Burdidge and Harrison (1984), by analyzing the lapse of time between 1962 and 1982, examined the effects of oil shocks in several OECD countries. Rotemberg et al. (1996) and Finn (2000) analysed oil price shocks with an imperfect and perfect competitive model, respectively. Rotemberg et al. (1996) discussed the oil price turmoil effects on the U.S. economy, by hypothesizing that monopolistic competition is responsible for amplifying the oil price shock impact. By using imperfect competitive models, they explained the effect of oil price increases on output and real wages. The results indicate that a large monetary contraction might produce effects on output and real wages, but it is unclear why “such large monetary contractions should follow oil price increases” (Rotemberg et al. (1996), p.572). Against the Rotemberg et al. (1996) theory, Finn (2000) argued that, through a theory of perfect competition, it is possible to explain the Rotemberg et al. (1996) evidence, concluding that an increase in energy prices might be considered as a technology shock able to induce contractions in the economic activity. The power of these shocks depends principally on the relationship between energy usage and capital services.
    The aim of Hooker’s paper (2002) was to analyse the structural break in the core of U.S inflation before 1981. His query concerns whether the abrupt decrease in energy prices can be attributed to an energy intensity decline of the U.S economy, the deregulation of energy industries and the monetary policy change in favour of less accommodative regimes. However, he did not find empirical support in any of the three hypotheses investigated. He claimed that the real cause of the energy prices decline can be linked to the movement to a low inflation environment resulting from a change in the monetary regime, thus rejecting the hypothesis that the pass-through was dampened by other factors.
    Following the strand of the aforementioned literature, Hamilton (2003), by analysing the effect of oil shock on GDP growth rate, described the following relation between the GDP rate of growth (yt) in quarter t and oil shocks (o#t) measured with 100 times the logarithmic amount by which oil prices exceed their peak over the previous 12 quarters, (while if the oil price are below the peak o#t = 0, there is no oil shock):
    yt =?1yt-1+?2yt-2 +?3yt-3 +?4yt-4 +?5o#t-1 - ?6o#t-2 + ?7o#t-3-?8o#t-4 +c
    He stated that oil price increases have a stronger effect on the economy, whereas such decreases do not seem to have the same impact. Moreover, Hamilton (2005) argued that oil price changes could not be predicted from earlier movements in other macro variables, and that one of the origins of oil spikes can be linked to exogenous factors such as military conflicts.
    Among the most recent contributions in this field, the studies of Blanchard and Gali (2007) and Hamilton (2008) analysed the causes and consequences of the 2007-2008 oil shock. Blanchard and Gali (2007) studied the reduction over time of the oil shock extent; they found that the recent oil shocks had a smaller effect on prices and wages, as well as on output and employment. Key causes for these changes are: (i) real wages rigidities (that generated a trade-off between the stabilszation effect of inflation and the output gap); (ii) the way monetary policy is conducted “[...] the stronger commitment by central banks to maintaining a low and stable rate of inflation targeting strategies, may have led to an improvement in the policy trade-off that make it possible to have a smaller impact of a given oil price increase on both inflation and output simultaneously” (Blanchard-Gali, 2007, pp 6); (iii) the lower presence of oil-intensive industry in the economy may have decreased the macroeconomic effects of price changes.
    Strictly focusing only on the determinants that engendered the unexpected oil price turmoil during the past few years, Hamilton (2008) said that among the many reasons that boosted the oil price during the summer of 2008, there was a low price elasticity of demand, strong growth from emerging economies (table 1), and the failure of global production to increase and thus respond to higher level of oil consumption (figure 2).

    Figure 2: Main world oil producers

    Source: Author elaboration on BP 2011 data set. Thousand barrels daily

    Furthermore, Hamilton (2008) said that the oil turmoil had a great effect on the U.S. economy in 2007 and 2008, concluding that it was one of the most important causes of the 2008 recession: ‘‘[...] the evidence to me is persuasive that, if there had there been no oil shock, we would have described the U.S economy in 2007:Q4-2008:Q3 as growing slowly, but not in a recession”. Jimenez-Rodriguez and Sanchez (2005) worked on the symmetric and asymmetric effects of oil price shocks on the real economic activity of the main industrialised economies (G7 countries, Norway and the Euro area) distinguishing between net oil importing and exporting countries. Through a Vector Autoregressive approach (VAR), he found that the real GDP growth of oil importing economies is negatively affected by increases in oil prices in both linear and non-linear models. In this type of uncertain oil price scenario, Rogoff (2006) stressed the unpredictable role of oil shock effects on the output, by highlighting the current lower impact of oil price fluctuations on the economic global growth rate as compared to two or three decades ago.
    Overall, I can conclude that, despite the vast literature related to economic growth and oil price behaviour, there is no shared consensus on the impact of oil price oscillations on economic growth. Nevertheless, the attempt to provide a general and unambiguous view on this issue has highlighted some principal features on the relationship between oil price fluctuations and economic growth:
    I) The exponential oil demand growth from China, the Middle East and other newly industrialised economies has contributed to the unstable oil prices level during last decade;
    II) The reduced amount of oil supplies in industrialised countries and the strong demand determine a tight situation on the oil market. This situation makes the whole market particularly vulnerable, leaving Saudi Arabia as the only producer with huge spare capacity;
    III) There is a stronger effect of rising, as opposed to decreasing, levels in oil prices on economic growth;
    IV) The importance of the shock-size, both in terms of the new real price of oil and the percentage increase in oil prices;
    V) All the recessions after 1973 have been associated with oil shocks, but not all oil shocks have led to a recession (Blanchard and Gali 2008, Hamilton, 2009 p. 255).


    R. Barsky and L. Kilian., Do we really know that oil caused that great stagflation? A monetary alternative“. NBER, Working paper ( 8389), 2002.
    R. Barsky and L. Kilian., Oil and the macroeconomy since the 1970s. NBER, Working paper (10855), 2004.
    B. Bernanke, M. Gertler, and M. Watson., Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity, 1997.
    O. Blanchard and J. Gali., The macroeconomic effects of oil shocks: Why are the 2000s so different from 1970s? NBER, Working Paper (13368), 1-77, 2007.
    D.R. Bohi., On the macroeconomic effects of energy price shocks. Resources and Energy, 13 (145-162), 1991
    J. Burbidge and A. Harrison., Testing for the effects of oil-prices rises using vector autoregressions. International Economic Review, 25, (459-484) 1984.
    M.G Finn., Perfect competition and the effects of energy price increases on economic activity. Journal of Money, Credit and Banking, 32 (400-416), 2000.
    J.D Hamilton., Oil and the Macroeconomy since world war II. Journal of Political Economy, 91 (228-248), 1983.
    J.D Hamilton., Historical causes of postwar oil shocks and recessions. The Energy Journal, 6 (1) (97-116), 1985.
    J.D Hamilton., Are the macroeconomic effects of oil-price changes symmetric?: A comment". Carnegie-Rocheter Conference Series on Public Policy, 1988.
    J.D. Hamilton., This is what happened to the oil price-macroeconomy relationship. Journal of Monetary Economics, 38 (215-220), 1996.
    J.D. Hamilton., What is an oil shock? Journal of Econometrics, 113, 2003.
    J.D Hamilton., Oil and the Macroeconomy. Palgrave Dictionary of Economics, 2005.
    L. Hamilton and Herrera M., Oil shocks and aggregate macroeconomic behavior: The role of monetary policy. Journal of Money, Credit, and Banking, 36 (265-286), 2004.
    M. Hooker., Are oil shocks inflationary? asymmetric and nonlinear specifications versus changes in regime. Journal of Money, Credit and Banking, 34 (540-561), 2002.
    L. Kilian., The effects of exogenous oil supply shocks on output and inflation: Evidence from the g7 countries. CEPR Discussion Papers, (5404), 2005.
    R. Jimenez-Rodriguez, and R. Sanchez., Oil Price shocks and the real gdp growth: empirical evidence for some OECD countries. Applied Economics, 37 (2), (201-228), 2005.
    K. Lee, S. Ni, and R. Ratti., Oil shocks and the macroeconomy: The role of price variability. Energy Journal, 18 (39-56), 1997.
    J.F., Mory., Oil prices shock, stock market, economic activity. Is the relationship symmetric? The Energy Journal, 14, (151-161), 1993.
    J. J. Rotemberg and M. Woodford., Imperfect competition and the effects of energy prices increases on economic activity. Journal of Money, Credit and Banking, 28-9 (549-577), 1996.
    K. Rogoff. Oil and the Global Economy. mimeo, 2006.


    If the recessionary consequences of oil price shocks are due to oil price shocks themselves, or instead to monetary policy decisions implemented as a policy tool to lower the repercussions of these shocks, is still a matter of discussion in the current debate about oil price turmoil in ?nancial markets. However, two principal strands of literature have analysed this phenomenon, deconstructing its effects into two different phases. In the first phase, an increase in oil prices produces a rise in domestic inflation: it implies a depression effect in the demand and, also, an important impact on the output level[1]. This implies higher interest rates, lower demand, and as a result, lower output (Segal 2007). Subsequently, in the second phase, other consequences arise once domestic consumers are conscious of the decline in real income caused by the effects of the ?rst phase. In particular, the empirical literature investigating the link between oil shock and monetary policies has been deeply interested to analyse the propagation mechanism through which the oil shock favours or gives its contribution to the macroeconomic recessions. The most important mechanisms examined are:
    The labour market: Davis and Haltiwanger (2001) say that the oil shock are one of the principal sources of employment distruction in any industrial sector. This is particularly due to the effect of the oil shock on the output and productivity;
    The use of instrumental good. Finn (2000) developed at the aggregate level a system where oil price increases depress the capital marginal output reducing, at the same time, the investment levels and the future capital stock;
    The interest rates behaviour. Balke et al. (2002) found the evidence that there is a consistent difference between the commercial papers' interest rates at 6 months, and the interest rates of the T-Bills at 6 months. It means that when the oil prices increases there is a bigger incentive for investors to buy less risky asset (T-Bills);
    The uncertainty and the investments level reduction. Bernanke (1983) estimated that there is a widespread tendency, in the industrial sector, to postpone any kind of investment until the uncertainty characterising the oil price behaviour decreases;
    The sectoral shock. The idea of the sectoral shock sustained by Lilien (1982) and Hamilton (1988) says that a shock with differential effects over different sectors might have a bigger impact on the aggregate employment. This happens because the effect on the employment of the oil shock on one sector might indirectly affect the employment level on another sector, if there are strict connections and mechanisms between the two sectors.

    Source: Author elaboration

    Nevertheless, there are a valuable number of contributions that do not convey the idea that an oil shock could have such a strict effect on the output as aforementioned. Since the end of the Eighties, Bohi (1989) has analysed the economic impact of the 1973-74 and 1979-80 oil shock on Japan and the USA economy. He did not find any evidence of the link between oil price variations and employment level in the productive sector, thus supporting the idea that the output reduction has to be attributed to a tight monetary policy (implemented to reduce the oil shock impact) rather than to the oil shock. The same view is shared by Mork (1989) who, introducing for the first time the concept of the asymmetric effects of oil price increases and decreases on output, found evidence that although oil price increases reduced the economic development, there is no evidence that oil price decreases stimulated the GDP growth. Through the idea of asymmetric effects of oil shock on GDP growth, Gilbert and Mork (1986) offered an explanation of the flat GDP growth elasticities to the oil shock decreases.
    By analysing the past U.S. business cycles and the oil price shock between 1965 and 1995 (table 2), Bernanke, Gertler and Watson (1997) discussed the decisions implemented by policy-makers to respond to macroeconomic shocks. In particular, they assessed the role and effects of the Federal Reserve’s policy response to the inflation caused by an oil price shock. Considering that oil shocks were exogenous, the Federal Reserve raised its interest rates in order to control inflation, obtaining the result of a monetary contraction, which is among the principal causes of economic downturns.
    Although on one side a contractionary monetary policy has the effect to reduce the inflation level (figure. 1), on the other side, it might have a negative impact on the economic performance.

    Figure 1: Effects of an oil price increase

    Bernanke et al. (1997) claimed that
    an alternative monetary policy during the Seventies, i.e. ?xing the nominal interest rates, might have a better effect on aggregate output, thus erasing the negative consequences of oil-price shocks on the U.S economy. Hamilton and Herrera (2004) rebuted this work. They reshaped the Bernanke et al. (1997) study, by using a different approach and ?nding that oil price increases are the principal cause of lower levels of real output: contractionary monetary policy does not play the bigger role in generating this downturn.Bernanke et al. (1997) underlined the positive and in?uential role of monetary policy in eliminating any recessionary consequence of an oil price shock. Their work sustains the idea that a proper monetary policy has to beset in order to eliminate, or at least reduce, any recessionary consequences of oil price shocks. Conversely, Hamilton and Herrera (2004) argued that even with aggressive monetary policies, the Federal Reserve System did not succeed in averting a downturn. Focusing on this view, Leduc and Sill (2004) examined a variety of monetary policy options in different general equilibrium models, concluding that the central banks behavior cannot be considered wholly efficient in protecting their economies from the consequences of oil-price shocks. In the light of the discussion above, it emerges that the relationship between oil price movements, macroeconomics and inflation is neither clearly predictable nor straightforward to understand. We can nonetheless draw the following conclusions:
    1) The relationship between oil price and inflation has been
    weakened so much that the correlation between these changes is in fact weaker now than in the Seventies (Rogoff 2006; Blanchard and Gali, 2008). Furthermore, the new market composition has helped to reduce the impact of oil price turmoil on real and expected inflation;
    2) As argued in Segal (2007), monetary policy is the most important channel through which fluctuations in oil prices affect aggregate output.
    This is because when oil prices affect inflation, monetary authorities raise interest rates, thus slowing down the growth rate (Roubini, 2004).
    Overall, I can state that the choice of which policy is better suited to face the oil price turmoil has to be examined by considering the peculiarities and the conditions of each shock. All the macroeconomic effects that an oil price increase might generate have to be taken into consideration, including a deep analysis on the potential output. Furthermore, it might result very important to observe any other factor affecting the inflation level, as the oil price shock effects are much weaker now than during the Seventies
    [1]. This analysis will not set aside from the study of the origin of these shocks (led by supply and demand components), where more appropriate monetary policies might be implemented at the national and international level, to limit the strong impact and consequences of a shock on the real economy.
    1Historically, the most important oil shocks have been caused by a supply shock.
    2A key factor to understand that the real economy consequences of the last increases in the oil prices are much weaker as compared to the ones during the Seventies is provided by the productive structure and the factors endowment that look at the industrialised European economies that are less oil-intensive.

    N.S, Balke et al., Oil price shocks and the U.S. economy: Where does the asymmetry originate? The Energy Journal, 23, 27-52.
    B. Bernanke., Irreversibility, Uncertainty, and Cyclical investment. Quarterly Journal of Economics, 98, 85-106.
    B. Bernanke, M. Gertler., and M. Watson. Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity,1,91-142, 1997.
    O. Blanchard and J. Gali., The macroeconomic effects of oil shocks: Why are the 2000s so different from 1970s? NBER, Working Paper(13368):1-77, 2007.
    D.R. Bohi., On the macroeconomic effects of energy price shocks. Resources and Energy, 13(145-162), 1991.
    S.J., Davis, Haltiwanger J., Sectoral job creation and destruction response to oil price changes, Journal of Monetary Economics, 48, (465-512) 2001.
    M.G. Finn., Perfect competition and the effects of energy price increases on economic activity, Journal of Money, Credit and Banking, 32, (400-416) 200.
    R.J. Gilbert, and K.A. Mork., Efficient Pricing During Oil Supply Disruption, The Energy Journal, 7, (51-68) 1986.
    J.D. Hamilton., "Are the macroeconomic effects of oil-price changes symmetric?: A comment". Carnegie-Rocheter Conference Series on Public Policy, 1988.
    L. Hamilton, and M. Herrera., Oil shocks and aggregate macroeconomic behavior: The role of monetary policy. Journal of Money, Credit, and Banking, 36 (265-286), 2004.
    S. Leduc. and K. Sill., A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturn. Journal of Monetary Economics, 51 (781-808), 2004
    D. Lilien., Sectoral Shifts and Cyclical Unemployment, 90, (777-793), 1982.
    K.A. Mork., Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries, The Energy Journal, 14, (151-161), 1994.
    K. Rogoff, Oil and the global economy. Mimeo, 2006.
    N. Roubini, and B. Sester., The effects of the recent oil price shock on the U.S. and global economy 2004.
    P. Segal., Why do oil price shocks no longer shock? Oxford Institute for Energy Studies, WPM 35, 2007.

    © 2011 ASSONEBB


    A key characteristic of the oil market is that the oil path shows large swings either up or down, which are then followed by reversal swings arounda certain central tendency. Prices and inventory levels oscillate considerablyfrom day-to-day or from week-to-week. This is partially due to predictable forces (deterministic components, i.e., seasonal shifts) and unpredictable factors (stochastic component, i.e. random shocks). In the ?rst case, a key role is played by geopolitical developments, supply and demandfactors and fears of potential disruptions. These movements are principally linked to their impact on expectations regarding the future evolution of thefundamentals than on proper structural changes. In the second case, the ?nancial character of oil prices has been a relevant source of this unstable oilpath. Here, the causes and forces of oil shocks during the last forty yearshave to be investigated both from deterministic forces and stochastic drivers.
    If during the 1970s, the key cause of oil shocks was the reduction inglobal oil supply, currently one of the principal features of the turmoil in 2008 has been the increasing oil demand from emerging countries, such as China and India. In parallel with the physical side market developments due to an higher demand level, the related oil derivativesmarkets have seen an increased number of ?nancial operators involved inaccumulating substantial net short and long positions in crude oil futures, principally in the over-the-counter market (OTC) (Fattouh 2010). This growing importance of the futures market over the last two decades is aresult of a number of key transformations in the oil international marketsuch as the change in the international pricing system, the massive new-entry of ?nancial players, and the increasing number in players diversity,such as hedge and investment funds in the oil ?nancial markets. As noted by Alan Greenspan (2004),“… It became apparent that the world industry was not investing enough to expand crude oil production capacity quickly enoughto meet rising demand, increasing numbers of hedge funds and other institutional investors began bidding for oil.
    A good percentage of the billions of dollars poured into oil
    ?nancial products came from ?nancial institutions and investment funds that do not use the commodity as part of their business”: this is de?ned as speculationby the Commodity Futures Trading Commission (Buyuksahin, 2008).

    Source: Author elaborations on Bloomberg dataset
    Further, that additional demand for
    the physical oil barrels delivery drives up the spot price increasing theuncertainty on its future level (fig. 1). However, the size of this increased demandoriginated by the speculative channel is still a matter of extensive discussion. The US Senate (2006) estimates that speculative oil futures purchases could contribute toadd a further 20-30% per barrel to the current price. Furthermore, bypurchasing large numbers of futures contracts, speculators have provided a?nancial incentive for oil companies to buy more oil and place it in storage.The result is a strong increase of oil inventories reached in 2010.
    Moosa (1996) model, Silvapulle and Moosa (1999) de?ne speculation as the difference between the current futures price and the futuresprice expected to prevail in the future. Pindyck (2001) includes thespeculative element in the error term, stating that fundamental forces areable to explain a consistent part of the short-run dynamics of prices, but not the other factors in?uencing oil price formation. Investigating the stochastic oil prices movements starting with the 2008 oil price peak, Masters (2008) shows that the ?rst cause of this turmoil has to be addressed to the oil ?nancialization aspect. Contrary, Masters (2008) and Hamilton (2008) state that a low price elasticity of demand and the failure of physical production to increase haveplayed a bigger role in this turmoil. Sustaining the Hamilton idea, Stevensand Sessions (2008) say that there is not any empirical evidence toidentify the financial speculation as the principal responsible of abrupt oil rises, and that sucha hypothesis is completely unsupported by the rudiments of supply anddemand. Furthermore, they observe a normal level in inventories, which implies that the rise in oil prices is not the result of runaway speculation, but it is rather the consequence of decreasing supply and the rapid growthof developing economies such as China and India. They claim that if themarket regulators priority is in limiting the oil speculation, theyshould keep the shorter-term (one-two months) futures contracts erasing the more speculative six-month futures contracts. Focusing again on the 2008oil shock, Amenc et al. (2008) point out that low demand growth ofreserves from non-OECD countries, OPECs strategy to increase prices, andslow growth in oil supply from non-OPEC countries have been the mostimportant cause of the oil spikes. According to the IEA report of July, 2008 Blaming speculation is an easy solution which avoids taking the necessary steps to improve supply-side access and investment or to implement measures to improve energy efficiency”.
    As already stated in Dicembrino and Scandizzo (2011) the financial speculation issue on international markets is a crucial problem where policy makers have to provide concrete answers to limit the negative impact in terms of production and trade, that the oil shock might take to the potential and real output. In this direction, targeted policies have to be implemented to limit the speculation, as such as the “Tobin Tax” on financial transactions; a bigger market transparency able to limit the surprise effect of news and deep changes in market regulation would prevent short-run movements destabilizing the financial markets.

    Amenc. N., Till, B., and N. Maffei., Oil prices: the true role of speculation. Edhec Risk and Asset Management Research Centre, 2008.
    Buyuksahin, B. Haigh, M.S., Harris, J.H., Overdahl., J.A. and Robe, M.A., Market Growth and Trader Participation in Futures Markets, CFTC-Office of the Chief Economist, Working Paper, 2008.
    Dicembrino, C., and Scandizzo, P.L., The Fundamental and Speculative component of the oil spot price: A real option approach. Paper presented at the ESE Energy and Finance Conference, Rotterdam School of Economics, 5th October 2011.
    Greenspan, A., Oil. Speech Presented at the National Italian American Association, 2004.
    Fattouh, B., Oil market dynamics through the lens of the 2002-2009 price cycle. Oxford Institute for Energy Studies, 2010.
    Hamilton, J.D., Understanding Crude Oil Prices. NBER Working Papers (14492) 2008.
    Hooker, A.M., What happened to the oil price-macroeconomy relationship? Journal of Monetary Economics, 38 (195-213), 1996.
    Masters, M., Managing member portfolio manager, masters capital management, llc. Testimony before the U.S. Senate Committee on Homeland Security and Governmental, 2008.
    Moosa, I.A., An econometric model of price determination in the crude oil futures markets. In M. McAleer, P., and Leong, K: Proceedings of the Econometric Society Australian Meeting, 3 (373-402), 1996.
    Moosa, I.A., Silvapulla, P., The relationship between spot and futures prices: Evidence from the crude oil market the relationship between spot and futures prices: Evidence from the crude oil market. Journal of Futures Markets, (157-193), 1999.
    Pindyck, R.S., The Dynamics of Commodity Spot and Futures Markets: A Primer. The Energy Journal, 22 (1-29), 2001
    Stevans, L.K., and Sessions, D.N., Speculation, Futures Prices and U.S. Real Price of Crude Oil. Available at SSRN:
    http://ssrn.com/abstract=1154686, 2008.
    ©2011 ASSONEBB


    The dependence of the world economy on oil represents a crucial issue that has been widely explored in the extensive literature on energy economics. As oil price volatility has risen, there has been an increasing interest both by academics and practitioners in understanding the behaviorof oil prices. Higher demand for inventories and reduced supply will determine higher oil prices. In this regard, it emerges that oil pricevariations are partly deterministic (oil reserves, oil supplyand demand, OPEC policy-decisions) and partly random and unpredictable(oil commodity as a ?nancial asset exchanged in the stock market). Thispeculiarity makes the oil commodity difficult to predict both for industrialpolicy purposes and from a financial investment point of view. Nonetheless, several specifications have been proposed in the economic literature forstudying and forecasting oil price volatility, in particular examining boththe oil price term structure and ability of futures prices in predicting oilspot prices, as well as the volatility of spot and futures prices themselves.One of the causes of this unpredictability and the consequent instability ofoil prices has to be analyzed through theoil price dichotomy(Fattouh2010), i.e., oil seen both as a commodity traded over the physical market where the equilibrium price emerges from the interaction of supply anddemand, and on the other side, as a financial asset where traders exchangetheir assets in order to cover their risky positions and speculative actions.
    Several empirical techniques such as ARCH and GARCH models (Bollerslev et al. (1986), and Engle, R. (1982)), principal components analysis (PCA), jump-diffusion processes and the one, two
    and three factor models have been implemented to model oil price volatility1. As discussed in Bollerslev et al. (1992) Figlewski (1997) andPoon and Granger (2003), there are extensive reasons why volatility is a key variable to be investigated in commodity market literature.As underlined in Brook et al. (2004), the volatility factor of oilprices has to be assessed in considering the persisting character of this phenomenon. Looking at the time series data of the oil shock in the seventiesand the nineties, the different nature of such shocks prevents researchersfrom recognizing common factors and thus leaving the future oil price behavior unpredictable. Trying to identify drivers responsible for oil price volatility, Herce et al. (2006) claim that the great part of oilprice volatility is due to short term transitory factors that tend to lose theirinfluence in the long run. Observing weekly oil futures prices traded on NYMEX from September 1989 to May 2006, they look at what portion ofoil price oscillations is due to short-run factors such as volatility, and howmuch has to be attributed to long-run factors, such as demand and supplystructural changes, and at the same time, what part is due to the factorcorrelations. They show that longer maturity futures contracts incorporate a small component of short-term transitory volatility. Huang et al.(2009) analyze both the short-term dynamics and arbitrage possibilitiesbetween futures and spot prices of crude oil. Following the Pindyck’s hypothesis, (2001), they observe the decade from 1990 to 2001, findingan inverse relationship between volatility (caused by external shock) andinventory level. Pindyck (2001) analyzes short-run commodity pricedynamics addressing oscillations, production and inventory levels. He disaggregates the principal oil market drivers, focusing on several keyvariables and their effects on market volatility. He asserts that producersdecide oil production levels considering their expected inventory, and thesedecisions are then taken considering two different prices (a spot price for saleof the commodity itself and a price for storage). Cash markets depend onother variables such as weather conditions, aggregate income, capital stocks, random shocks and technological changes. Following the Krichene (2005) let us identify the oil demand and supply as:
    And the oil demand (OD) in function of:
    x=Oil production (millions of barrels per day)
    w=Oil price (per barrel)
    z=GDP index for the G7 countries
    And the oil supply (OS) in function of:
    x=Oil production (millions of barrels per day)
    we =
    Expected oil price (per barrel)
    g=Natural Gas production (billions of m3)
    d= Dummy variable for the large oil price swings

    In this mechanism, it is observable a component characterized by “fundamental” factors (supply and demand equilibrium) and another one led bynoise trading speculative drivers (randomshifts). Pindyck (2001) theorizes that the fundamental variables can explain a largepart of the short-run price dynamics, but they are inefficient to entirely capture the whole dynamic behind price oscillations. Empirically, what he hasshown is that when real oil prices were approximately US$ 20 per barrel in2000 dollars, the U.S. productivity growth in manufacturing was between1.18% and 1.99% per annum. Instead, with the oil prices averaged over US$43 per barrel (in real price adjusted terms), productivity growth was only0.31% per annum. He thereby concludes that both short and long-term oilprice volatility is still a large and unsolved problem, but that a risk sharingmechanism and a larger buffer stock of oil prices can be an effective instrumentfor volatility reduction. Theoil price oscillations characterizing the oil price path during last decade can be observed in a series of reverse oscillations: the WTI oil price traded at US$ 50 p/b at the beginning of 2007, US$100 p/b in March of 2008, US$145 p/b in August 2008, US$33 p/b in Febraury 2009 and newly at US$113 p/b in April 2011 (figure 1).
    FIGURE 1 WTI PRICE 2001-2011

    These abrupt price variations, in such a short time, have irreversibly impacted on the investment decisions of producers, consumers and policy makers. Even if this turmoil can be interpreted as an oil price characteristic, it still exists a margin to limit the volatility and to reduce the frequency with the aim to contain the negative impacts on the aggregate output.
    By the demand side, the policy makers initiatives might be focused on the strength of mechanisms able to provide a prompt answer to market dynamics, including price oscillations in international markets. Specific insurance schemes could be implemented as protection mechanisms for people principally affected by the volatility. From the supply side, stable and planned investments with fiscal aids by country, can reduce the market turbulences offering a stable and less uncertain view of the oil production over the medium and long term. Public-private agreements could take advantage of synergies and specific competences of any actor in the field. A higher market transparence level and a greater supervision from the regulatory point of view could offer an important aid to maximize the benefits coming from the financialization, and, at the same time, it could decrease the potential risks linked to the monetary stability. A higher frequency and a greater disaggregation of financial flows and detailed info on derivative contracts might clarify the dynamics of factors influencing the price composition process.
    Overall we can highlight that, in order to avoid extreme price variations, producers, financial investors and market regulators have to contribute in their specific roles to improve both the financial market regulations (in matter of commodity financial trading) and the real mechanisms in the international oil markets.
    Concluding, we can say that the short-term price volatility is a key feature in the oil market with crucial effects on investments. In the short run,as underlined by Brook (2004), the low price elasticities of world demand and non-OPEC oil supply make oil prices highly reactive to supplyand demand variations. Price volatility oscillations, increased by geopolitical frictions and disequilibria, raise uncertainty about underlying pricetrends, tending to depress oil exploration.
    1Arch (autoregressive conditional heteroskedasticity). Garch (General autoregressive conditional heteroskedasticity).

    T. Bollerslev., Generalized Autoregressive Conditional Heteroskedasticity, Journal of Econometrics 31, (307-327) 1986.
    A. Brook, R. Price, D.Sutherland, D, N. Westerlund, and C. Andrè., Oil price developments: Drivers, Econmomic Consequences and Policy Responses. Economics Department Working Papers, No. 412, 2004 .
    R. Engle., Autoregressive Conditional Heteroskedasticity with Estimates of Variance of United Kingdom Inflation, Econometrica 50, (987-1008) 1982
    B. Fattouh., Oil market dynamics through the lens of the 2002-2009 price cycle. Oxford Institute for Energy Studies, 2010.
    S. Figlewsky., Forecasting Volatility, Financial Markets, Institutions and Instruments, 6 (1-88), 1997.
    M. Herce, J.E. Parsons, and Ready, R.C., Using futures prices to filter short-term volatility and recover a latent, long-term prices series for oil. Center for Energy and Environmental Policy Research (CEEPR) 06-005 WP, 2006
    B.N. Huang, C.W. Yang, and M.J. Hwang., The dynamics of a nonlinear relationship between crude oil spot and futures prices: a multivariate threshold regression approach. Energy Economics, 31(91-98), 2009.
    N. Krichene., World Crude Oil and Natural Gas: a demand and supply model, Energy Economics 24, (557-576) 2002.
    N. Krichene., A simultaneous equations model for world crude oil and natural gas markets. IMF Working Paper, pages (1-24) WP/05/32, 2005.
    R.S. Pindyck., The dynamics of commodity spot and futures markets: A primer. The Energy Journal, 3 (1-22), 2001.
    S.H. Poon, and C.W.J. Granger., Forecasting volatility in financial markets: a review. Journal of Economic Literature, 2003.

    © 2011 ASSONEBB


    Accidental crude oil dumping (or of oil products) from a well, pipe, or tanker due to a random and accidental event. Intentional or operational dumping generally refers to hydrocarbons released as a consequence of the washing operations of oil tankers, drilling (after their utilisation) and chemical industry wastes.
    Editor: Claudio DICEMBRINO
    © 2009 ASSONEBB


    An active debate is currently takiing place around the definition of both "systemic event" and "systemic RISK" and their effects. Despite the considerable amount of literature on the topic, there is no shared consensus about its meaning, features and policy implications. It is of fundamental importance to define the concept of systemic risk, by exploring both its macro and micro foundations and, at the same time, by focusing on its repercussions and interlinkages with the concept of systemic event. By highlighting the complexity of this issue, Alan Greenspan (1994), as chair of the FED, underlined that "the very definition of systemic risk is somewhat unsettled". Following Kaufman’s contribution (2003), three broad strands of literature were investigated in the attempt of providing a clear definition of this concept.
    The first strand examines the repercussions of systemic risk at a macro-level, i.e. the risk spreading mechanism not only in the domestic economy but also across the entire international banking, financial, or economic system, rather than across a few institutions (Bartholomew and al. 1995). Mishkin (1995) focused more on the investment repercussions of such an important event, saying that systemic risk is "the likelihood of a sudden, usually unexpected, event that disrupts information in financial markets, making them unable to effectively channel funds to those parties with the most productive investment opportunities". In this regard, Allen and Gale (1998) analysed the cause-effect process through which macro-shocks can spark contagion episodes and bank runs. In this framework, Bordo et al. (1998) defined systemic risk as a situation where "shocks to one part of the financial system lead to shocks elsewhere, in turn impinging on the stability of the real economy" (pp. 31). In their exhaustive literature, De Bandt and Hartmann (2002) offered a similar view of a systemic event, saying that it takes place when a shock affects "a considerable number of financial institutions or markets in a strong sense, thereby severely impairing the general well-functioning (of an important part) of the financial system. The well-functioning of the financial system relates to the effectiveness and efficiency with which savings are channelled into the real investments promising the highest returns" (p. 11). They further defined systemic risk as the risk of experiencing a systemic event. In 2003, Kaufman referred to systemic risk as the risk or probability of collapse of an entire financial system. De Nicolò and Kwast (2002), Kupiec and Nickerson (2004) and Dow (2000) defined systemic risk as a mechanism that, at the same time of the shock, affects the entire financial system. In particular, Dow (2000) analysed systemic risk in four different ways: the disruption of the payment system due to the default of one or more banks, the depression of banking asset's values, the general fear of losing savings (simultaneous withdrawals from banks) and the reduction of national incomes linked to macroeconomic changes. The micro foundations of systemic risk across shock-transmissions and spillover effects on the entire financial system have given rise to another strand of literature. The following contributions emphasized causation mechanisms requiring close and direct connections between several institutions and different markets. Kaufman (1995) underlined that systemic risk is the probability that cumulative losses originate from an event that, through a contagion effect, involves a chain of institutions belonging to a market. The Board of Governors of the FED (2007) in providing the definition of systemic risk analysed the solvency capacity of institutions involved in a "private large-dollar payments network were unable or unwilling to settle its net debt position. […] Serious repercussions could, as a result, spread to other participants in the private network, to other depository institutions not participating in the network, and to the nonfinancial economy generally". Kambhu et al. (2007) defined systemic risk as the situation when financial shocks "have the potential to lead to substantial, adverse effects on the real economy, e.g., a reduction in productive investment due to the reduction in credit provision or a destabilization of economic activity". This contribution has stressed the transmission of financial events to the real economy, which represents the key element distinguishing it from a purely financial event.
    A second definition of systemic risk from a microeconomic point of view arises from the interaction of exposures of the institutions in crisis with other subjects (third parties) involved in their businesses. Although this strand of the literature focuses on the spillover from an initial exogenous external shock, it does not include a direct causation mechanism, as underlined in the previous definition, but it rather emphasises similarities in third-party risk exposures between the units involved (Kaufman 2003). In this second meaning, it is of crucial relevance to evaluate the nature of the key-exposures of the involved parties and to assess the potential losses stemming from the original shock. We can state that this is a phenomenon that can be described as a correlation without direct causation between the implicated agents. Following with the analysis of the agents involved in periods of financial difficulties, it is of fundamental importance to assess the risk-exposure from common-shock contagion. This contagion effect indiscriminately affects more or less the entire universe reflecting a general loss of confidence in all the units (solvent and insolvent) involved in the system. Referring not only to bankruptcy but also to the default of all market participants, the G-10 Report on Financial Consolidation (2001) defined systemic risk as: "[…] a risk that an event will trigger a loss of confidence in a substantial portion of the financial system that is serious enough to have adverse consequences for the real economy". Such definition is shared by the US Commodity Futures trading commission (2005) that described it as the risk that a market participant’s default involves the other participants due to the interlocking nature of financial markets. Kaufman (1996) referred to cumulative losses that occur starting from an event that ignites successive losses along a chain of financial institutions or markets. De Bandt and Hartmann (2000) looked at systemic risk as the experiencing of a systemic event. This involves a Y institution in second-round as a consequence of an initial shock that has impacted on the X institution even if the Y institution was fully solvent at the beginning. We find this feature also in Bartram, Brown, Hund (2005), where systemic risk affects the unexposed institutions not otherwise involved by a crisis, given its economic fundamentals. The domino effect is explicitly defined as the likelihood that a failure of one bank triggers a chain reaction causing other banks to fail through interbank loans (Sheldon et al, 2008).
    Overall, we can conclude that despite the vast literature on systemic risk, a clear and shared view of this term has not emerged. Nevertheless, the attempt to provide a general and unambiguous definition of systemic risk, both at a macro and micro level, has highlighted three principal aspects that must be recognised:
    1. It must impact on a "substantial portion" of the financial system.
    2. It has to involve spillovers of risk from one institution to many others.
    3. As a consequence of systemic risk, strong and adverse macroeconomic effects must be registered.
    Editor: Claudio DICEMBRINO
    © 2011 ASSONEBB


    (See also Online Trading definition)


    Online trading is a digitized trading of financial instruments (stocks, bonds, futures, etc ...) carried out by investors through internet. Online trading is a service of financial companies, authorized by the Commissione Nazionale per le Società e la Borsa (Consob), known as online brokers or digital intermediaries (eg. Banks). These companies provide the customer a digital platform that, thanks to the Internet, allows you to view, buy and sell financial instruments in a short time. The feature of this service is in the remote operation, allowing the investor to give orders to the intermediary through a connection with the web site.

    Featuresand Regulation

    The online trading has developed in the Italian market in the nineties and has mainly success to the speed of orders transmission, to the almost total elimination of the error risk in their transposition and especially to the containment of trading commissions. In 1995 born the first trading platforms in Italy, following the rapid expansion of the phenomenon, thanks to the gradual spread of the Internet, the Consob in 1998 establish it and regulate it with Consob Regulation no. 11971 for enforcement of Legislative Decree 24 February 1998 n. 58. The spread of the Internet also promoted the role of alternative trading platforms, like Alternative Trading Systems (ATS) or Electronic Communication Networks (ECN), used by institutional and professional investors and generally can not be used by individual investors. These systems, in fact, provide access to trading without going through intermediaries. Among the applicable legislation, the Legislative Decree 24 February 1998 n.58 takes the value of the primary source of law while secondary are: the enforcement Regulations of T.U. concerning the regulation of intermediaries adopted by Consob with resolution no. 11522 of July 1, 1998, then amended by resolution no. 11745 of 9 December 1998, and also the enforcement Regulations of T.U adopted by Consob with resolution no. 11971 of 14 May 1999. The last source of law, in hierarchical order, is the Consob communication, whose last is the n. DI / 30396 of 21 April 2000, which summarizes the rules applicable to online trading.

    Within the overall framework of the regulation applicable to online trading, we can identify some key areas that regulate the start-up phase of the relationship with the investor:

    Qualified entities to trading: Authorized intermediaries to negotiation of trade online are listed by 'art.30 paragraphs 3, 4, 5 of T.U.:

    - Authorized entities to the placement of financial instruments, with or without prior subscription or purchase to be detained, or assumption of guarantees to issuers;

    - Investment Management Company (IMCO)and SICAVs, exclusively for units and shares in investment funds;

    - Investment firms, banks, financial intermediaries ex art.107 T.U., IMCO, however, relatively to its investment services.

    Contract agreement: under the laws in force, the contract agreement for investment services should be, as a rule, in writing. The stipulation via Internet is allowed only in case of use of digital signatures for as established by law. Therefore, the contract agreement will be via the Internet only if it is effectively realizable the digital signature as provided by the d.p.r. 10 november 1997, n. 513, for the enforcement of art. 15, comma 2, law 15 march 1997, n. 59. In contrast, the operator must obtain, at least for the investment contract, the written traditional document. The same applies to any other statement negotiating. Particularly important have the recent Directive 2002/65 / EC applies to all online trading transactions, even when the contract reach a conclusion on line, while in Italy under national regulations on financial matters, it must be in writing as a condition of validity.

    Customer identification for the purpose of anti-money laundering measures: at the start of the account, the intermediary must identify the customer as required by law no. 197/1991 and by the related regulations. For this reason, the service provider often use, as permitted by law, the faculty of indirect identification thanks to the obtaining appropriate certification by other intermediary, usually a bank, to heed the funds transfer.

    Information for customers: the ways of online provision of the service does not relieve intermediaries from the rules in force concerning the prior information to the investor. It is compatible with the rules in place, the option to make available through the website the document on the general risks of investing in financial instruments, which should be delivered to the investor before provision of investment services and accessories these connected. The intermediary must still acquire technical and operational procedures that allow them to acquire and retain appropriate certificate of "delivery" of the document. Furthermore, intermediaries must operate in such a way that customers "are kept adequately informed" (Art. 21, paragraph 1, lett. B) of the Decree. N. 58/1998), and behave with "fairness and transparency, in the interests of customers" (art. 21, paragraph 1, lett. A) of the Decree. N. 58/1998).

    Information to be acquired by customers: intermediaries are required to fulfill the obligation to "acquire the necessary information from customers" (art. 21, paragraph 1, lett. B) of the Decree. N. 58/1998) and, in particular, before the start of the service, "the investor should ask for information about their experience in investments of financial instruments, its financial situation, its investment objectives, as well as to the his risk propensity "(Art. 28, paragraph 1, lett. a) of Regulation No. 11522/1998). The current rules do not means the specific procedures and methods of acquiring information on the investor; the definition of such procedures and methods is based on the operators discretion.

    With regard to the phase of execution online investment services for third parties and for transmit orders:

    System efficiency: intermediaries who provide online trading services are required to have internal information systems to guarantee promptly execution of the orders given by investors (Art. 26, paragraph 1, lett. d) of Regulation No. 11522/1998). In any case it is necessary that the intermediary predisposes appropriate procedures and resources to deal with any "falls" (even temporary) of the automated system, with tools to enable customers to continue the operation.

    Information on the nature and risks of the operations, and the significant losses: intermediaries must comply the provisions of art. 28, paragraph 2, of Regulation n. 11522/1998, under which it is necessary to provide the investor with adequate information on the nature, risks and implications of the operations, because the knowledge of which is necessary to make informed investment decisions. This obligation have continuing nature and does not end at the first operation.

    Adequacy: intermediaries must assess the adequacy of individual the transactions arranged by investors under Article. 29 of Regulation No. 11522/1998, even if the investment service is provided online. This rule requires the intermediary to assess the adequacy of the operation compared to the profile of the investor, preparing and activating specific procedures, to consider operation characteristics in relation to the customer profile. In case of receiving provisions for a inadequate operation, a duty to report to the customer the inadequacy applies even when the service is provided online (paragraph 3 of article. 29 of Regulation No. 11522/1998).

    Conflicts of interest: the same observations about the adequacy, apply, with reference to the provision (Art. 27, paragraph 2 of the Regulation no. 11522/1998) that "authorized intermediaries can not carry out transactions on behalf of its customers if they have a direct or indirect conflict of interest, unless they have previously informed in writing the investor on the nature of their interest in the transaction and the investor has expressly agreed in writing the conduct of 'operation. Where the transaction is concluded by telephone, the respect of the disclosure requirements and authorization by the investor must arise from recording on magnetic tape or an equivalent tool”. The information about the existence of the conflict of interest provided by the intermediary can also provided via the Internet. Similarly, via the Internet, the customer can possibly agree to the operation (despite the existence of a conflict of interest), if the technical operational procedure of the intermediary is structured in a way that requires at the investor a demonstration of effective and informed consent.

    Declaration of orders, and reporting: in case of receiving orders via the Internet, the obligation of release to the customer of declaration paper (art. 60 of Regulation no. 11522/1998) and the sending of the executed notice or periodic reporting (Art. 61 and art. 62 of Regulation no. 11522/1998) can also be realized through the use of the same network as the Internet, if the technical methods used allow the customer to acquire the availability of documentation on a permanent medium (Art. 75 , paragraph 3 of the Regulation no. 11522/1998).

    Procedures: the execution ways of the service, and customer interactions online, make it particularly important to guarantee the observance of the provision whereby intermediaries "equip themselves with appropriate procedures to reconstruct the ways, timing, and characteristics of conduct adopted in the provision of services" (Art. 56, paragraph 2, letter. a) of Regulation No. 11522/1998);

    Relationships with supervisory authorities: the intermediary must be able to promptly provide the documentation, from its archives, and to show it to the Supervisory Authorities.

    See more:

    Post trading e Settlement ICBPI


    SMART Trading online Gruppo BPER


    Trading Infofinanza Gruppo CARIGE

    Trading Online BAPR

    Trading Online VENETO BANCA


    Consob, Comunicazione n. DI/30396 del 21 aprile 2000

    Consob, website http://www.consob.it/

    GIRINO E. (2005) Dizionario di finanza. Tecniche-strumenti-operatori, Ipsoa

    RINALDI G. M. … IPERTI F. (2000) LA DISCIPLINA DEL TRADING ON LINE, Consulenza, Buffetti, n.26/2000

    Editor: Giovanni AVERSA


    Operational risk is defined as: "the risk of losses resulting from inadequate or failed internal processes, human actions and systems or from external events". This definition has been given by the New Basel Accord on capital adequacy (BASEL III - INTERNATIONAL REGULATORY FRAMEWORK FOR BANKS), which has included in the minimum regulatory capital charge for operational risk to provide banks with a sufficient degree of protection, and to give an incentive for innovation and development of sound operational RISK MANAGEMENT.

    Indeed, following the gradual deregulation and globalisation in the banking and financial sector, supervisors and the banking industry have recognized the importance of operational risk in measuring the risk profiles of financial institutions. In particular, there is a wide variety of sources of operational risks. These are generally identified in the use of more highly automated technology, the spread of e-commerce, large-scale mergers and acquisitions supported by integrated systems, the expansion of banks that have become very large-volume service providers, and the intensification of the use of financing techniques.

    Historically, banks have relied on internal control mechanisms to prevent some categories of operational risks such as frauds, telecommunication problems, misuse of confidential customer information, and improper trading activities on the bank’s account. Successively, following the evolution of the banking sector and in line with the international principles and guidelines provided by the Basel Committee On Banking Supervision (BCSB), new practices have been introduced. As a result, operational risk management has been gradually transformed in a comprehensive practice comparable to the management of credit and market risk.

    Basel Committee on Banking Supervision (2003), Sound Practices for the Management and Supervision of Operational Risk, February 2003.

    Editor: Bianca GIANNINI
    © 2018 ASSONEBB


    Right to buy or sell property that is granted in exchange for an agreed-upon sum. If the right is not exercised after a specified period, the option expires and the buyer loses the premium paid. Options are securities transaction agreements on stocks, commodities, probabilities, indices. Because a small amount of money is required to open a position in the option market, leverage is relevant and provides great profits to (successfull) investors.

    Option call: it gives the right to buy a predefined quantity of the underlying security at a fixed price before a specified date in the future (usually 1,3,6,9 months). For this right, the option call buyer pays a fee to the option call seller (premium). The buyer speculates that the price of the underlying security will rise before expiration date.

    Option put: it gives the right to sell a predefined quantity of the underlying security at a fixed price before a specified date in the future (usually 1,3,6,9 months). The buyer speculates that the price of the underlying will fall before the expiration date.


    A market structure1 is said to be order driven when the market price is determined by buy or sell orders submitted by brokers or dealers to a centralised location, where orders are matched and executed. The bidding mechanism prevailing in order driven markets is typically the auction mechanism. The interactions between the market participants are regulated by primary and secondary priority rules, normally set out by the market authority. If the price cannot be determined on the basis of a primary priority rule, then a secondary rule should apply. The opposite of an order driven market is a quote driven market.
    1Market structure is defined as the mechanism by which buyers and sellers interact to determine price and quantities.

    Editor: Bianca GIANNINI
    © 2010 ASSONEB


    It is a farm that voluntarily conforms to a regulated organic production system.
    The regulated organic production system takes the name of organic agriculture method. Organic agriculture is a type of agriculture that considers the entire agricultural system, exploits the ground's natural fertility by improving it with limited interventions, promotes the environment's biodiversity in which it operates, and excludes the use of synthesis products (excepts those that are specifically accepted by the community regulation) and genetically modified organisms.
    Common regulations that are relevant to the organic farms are:
    - Council regulation EC 834/07, regarding the organic production and the labelling of organic products which repeals CEE regulation 2091/92, that lists the fundamental norms on the organic production method. The regulation gives the basics for the sustainable development of the organic production and, at the same time, assures the actual functioning of the internal market, guarantees fair competition, assures the trust of the consumers and protects their interests. It sets objectives and common principles in order to enforce the norms that are defined in this regulation pertaining to:
    a) all the steps of production, preparation and distribution of organic products as well as their control;
    b) the use of indications related to organic production in the labelling and advertising process.
    - Commission regulation EC 889/08 of 5 September 2008 that lists modalities of enforcement of the Council regulation (EC) 834/2007 referring to organic production and the labelling of the organic products, with regard to organic production, labelling and controls.
    - Regulation 1698/05 of 20 September 2005 regarding the support to rural development by the European Agricultural Fund for Rural Development (EAFRD) defines the objectives that the rural development policy contributes to achieving. Within part II of the regulation, also called improvement of environment and rural space, specific support measures are provided (agro-environmental payments) to farms that sign engagements that go beyond the mandatory specific norms established in enforcement of articles 4 and 5 of the attachment III and IV of regulation (EC) 1782/2003 (Good Agricultural Practices), regarding the minimum requirements concerning the use of fertilizers and phytosanitary products and of other mandatory specific norms prescribed by national legislation.
    Such a direction of the regulation has been enforced within the Plans of Rural Development, promoted by each region, through the formalisation of an agricultural payment (Measure 2.1.4) meant for organic farms.
    The compliance of this regulation, started at an European level, and then applied at a national level and acknowledged at a regional level, provides for organic farms to be subject to periodical controls performed by specific checking bodies.
    Editor: Barbara PANCINO
    © 2009 ASSONEBB


    1. History and Objectives

    The Organisation for Economic Co-operation and Development (OECD) was formed in 1947. Initially called Organisation for European Economic Co-operation (OEEC), its priority objective was to undertake the reconstruction of the European economy after World War II by making use of the American aid of the European Recovery Program, well known as Marshall Plan.
    The first convention for economic co-operation between European countries was signed in 1948 and it came into effect on 28 July of the same year. The signatory states were Austria, Belgium, Denmark, France, Greece, Ireland, Iceland, Italy, Luxembourg, Norway, the Netherlands, Portugal, Sweden, Switzerland, Turkey, and the United Kingdom. Germany and Spain joined in 1959.
    The OECD was created with the aim of being a permanent organisation for economic co-operation, its headquarters were established at the Chteau de la Muette in Paris in 1949. The Organisation began to operate in accordance with the following principles:
    - to promote co-operation between participating members and their national production programmes for the reconstruction of Europe;
    - to develop intra-European trade by reducing tariffs and other barriers to the expansion of trade;
    - to study the feasibility of creating a customs union or free trade area;
    - to study multi-lateralisation of payments, and to achieve conditions for a better utilisation of labour.
    On 14 December 1960, the OECD was established and it aimed to create a real economic union between the member countries. The Organisation for Economic Co-operation and Development became effective from 30 September 1961 succeeding the OECE.
    In 1961, the OECD consisted of the European founder countries of the OEEC plus the United States and Canada. Over the years, many other countries, such as Japan (1964), Finland (1969), Australia (1971), New Zealand (1973), Mexico (1994), Korea (1996); the Czech Republic (1995), Poland (1996), Hungary (1996) and the Slovak Republic (2000) joined the Organisation. In a Supplementary Protocol to the OECD Convention, the signatory states decided that the Commission of the European Community "shall participate in the work" of the Organisation. This participation goes well beyond that of a mere observer, and in fact it gives the Commission quasi-Member status.
    The main mission of the OECD is to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus contributing to the development of the world economy and to the expansion of world trade on a multilateral and non-discriminatory basis. In order to participate to the development of the world economy, the Organisation has progressively extended its attention to a growing number of other countries, in addition to its thirty members. It now shares its expertise and accumulated experience with more than seventy developing and emerging market economies.
    In May 2007, OECD countries agreed to invite Chile, Estonia, Israel, Russia and Slovenia to open discussions for membership of the Organisation and offered enhanced engagement, with a view to possible membership, to Brazil, South Africa, China, India and Indonesia.

    2. Tools to reach the OECD’s goal

    The OECD pursues its goals by using different tools and activities, such as domestic and international policy co-ordination, data collection and analyses, policy experience comparison, and peer review examination, a process through which the performance of each country is monitored by their peers; the peer review process is regularly assessed by the Development Assistance Committee (DAC) providing international guidelines and monitoring development co-operation policies and programmes.
    In order to reach the OECD’s priority targets, member countries should manage all the resources at their disposal, promote scientific research and professional education, encourage economic growth and financial stability, as well as remove obstacles to free trade and capital movements.
    Member countries provide assistance to less developed countries through capital supply, technological assistance and market enlargement; furthermore, they cooperate and work on common projects, making available all the information and data required by the OECD. Nowadays, the OECD’s work is based on a worldwide range of topics such as education, science, agriculture, and taxation, giving special attention to economic co-operation and to goods, contracts and invisible capitals liberalisation.

    3. OECD’s structure

    The OECD’s structure includes the Council, made up of one representative per member country, plus a delegate of the European Commission, about 200 specialised Committees composed by representatives of the OECD members, and based on specific areas such as economics, trade, science, employment, education or financial markets, and the Secretariat, led by the Secretary-General.
    All member countries are represented in the Council, therefore it is the major authority of the OECD’s administration; the Council meets at ministerial level once a year to elect its president and two vice-presidents. Every decision is taken by consensus, except for special cases agreed unanimously. Countries can abstain from a single decision if they are not interested in.
    Committees meet each year to request, review and contribute to work undertaken by the OECD Secretariat. Committee members are typically subject-matter experts from member and non-member countries.
    The Secretariat is organised in Directorates. The Secretariat supports the activities of the committees, and carries out the work in response to priorities decided by the OECD Council. The Secretary-General is appointed by the Council, he/she serves a five-years term and is assisted by one or more Deputy Secretaries-General. Mexican Angel Gurría is the Secretary-General of the Organisation from 1 June 2006, in succession to Donald J. Johnston. Mr Gurría also chairs the Council, providing the link between national delegations and the Secretariat. Other additional tasks of the Secretary-General concern the preliminary study and implementation of Council and Committees instructions.

    4. Civil Society and the OECD

    The OECD recognises the valuable contribution that civil society can make to the public policy-making process, and attaches great importance to the Organisation’s own consultation and dialogue with civil society organisations (CSOs). Civil society is also involved in different OECD activities such as poverty reduction, sustainable growth, conflicts prevention and exchange capacity improvement. The OECD has co-operated with civil society since its creation in the field of environment. For many years, this co-operation took place principally through the Business and Industry Advisory Committee (BIAC) and the Trade Union Advisory Committee (TUAC). In the past decade, the OECD has extended these activities to a broader range of stakeholders, notably other international civil society organisations.
    The OECD has official relations with other international organisations, such as the International Labour Organization (ILO), International Monetary Fund (IMF), Food and Agriculture Organization (FAO), and World Bank.

    5. Statistics, social data and publishing

    The OECD has been one of the world's largest and most reliable sources of comparable statistics and economic and social data. As well as collecting data, the Organisation monitors trends, analyses and forecasts economic developments and researches social changes or evolving patterns in trade, environment, agriculture, technology, taxation and more. The Organisation represents one of the largest and most appreciated publishers in the fields of economics and public policy; OECD publications are the main vehicle for the circulation of its output, both on paper and online.
    Armingeon, K., Beyeler, M. (2004), The OECD and European Welfare States, Edward Elgar Publishing.
    Carlucci F., Cavone F. (2004), La Grande Europa … Integrazione, Allargamento, Sviluppo, FrancoAngeli.
    OECD (2008), Organisation for European Economy Co-operation, OECD website (http://www.oecd.org).
    OECD Historical Series (1997), Explorations in OEEC History, OECD Publishing.
    Editor: Federica ALFANI
    © 2009 ASSONEBB


    Trading in standardised financial instruments according to the pre-determined rules of an organised venue.

    ©2012 Editor: House of Lords


    A new category of organised venue defined by the recast MiFID regulation with the objective of extending transparency rules to execution techniques that are functionally equivalent to regulated markets and MTFs. The term encompasses broker crossing networks.

    ©2012 Editor: house of Lords


    Locations or systems through which organised trading occurs.

    ©2012 Editor: House of Lords



    In 2009, the G20 stated an ambition of moving standardized over-the-counter (OTC) derivatives from a bilaterally cleared to a centrally cleared model by the end of 2012. This kicked off a wave of new regulations in the US, EU and elsewhere, as well as major investments by banks, clearing houses, custodians and data providers.

  • Outlier

    It is a not significant, abnormal and information distorting value in the analysis of a time series and therefore it is omitted and not considered.


    Based on the dictates of market efficiency theory, stock prices immediately adapt to new information and there is no way to "beat the market". However, Behavioral Finance studies have shown that the market, based on the nature of the new information, reacts excessively (over-reaction) or too little (under-reaction).

    The over-reaction represents the excessive, disproportionate and optimistic reaction of investors to the availability of new information regarding certain securities on the market. This disproportionate reaction suggests that investors are overly influenced by random events and this reaction causes a change in the prices of the securities in the period following the publication of the new information, prices that no longer reflect the fundamental value of the securities.
    For De Bondt and Thaler (1985), the irrational investor has an overly optimistic reaction in the initial period with subsequent correction (a trend reversal) in the long run that tends to bring the price of the security back to its correct value. It may happen, therefore, that good news on a stock at a given time conditions its price for long periods, making it overvalued compared to the current value of expected future cash flows (fundamental value, Price Earning). This behavior of investors, which is clearly in contrast with the hypothesis of the efficiency of financial markets, can be generated by the representativeness mechanism that intervenes in the decision-making process of the individual or from the subject's over-confidence and is favored by imitative behavior .

    Representativeness is based on a limited number of simple and fast rules, ie investors' choices are formulated on the basis of stereotypes rather than on a logical and rational mechanism. Therefore, the estimate of the probability of an event seems to depend on how much it appears to be similar to a given category of events, regardless of the observable frequency and the sample size. The tendency to ignore the size of the sample often leads to errors, such as the so-called gambler fallacy analyzed by Kahneman and Tversky (1974), ie the propensity of investors to believe that the frequency of an event of a large sample can be observed also with reference to a small sample. For example, in gambling, individuals believe that a random event has a greater chance of occurring because it has not occurred for a certain period of time; in the lotto game the cd. late numbers.
    By imitative behavior, on the other hand, we mean the phenomenon through which individuals act in the same way, without there being any coordination between individuals (flock effect). The individual often finds it difficult to find the right answers, especially in times of uncertainty. For this reason it tends to pay attention to the actions and choices of other subjects. Furthermore, he believes that, following the behavior of other individuals (herd), the responsibility for any losses is not his, unlike when he adopts a strategy contrary to the trend. This effect, but also the general over-reaction of investors to new information, may underlie anomalies and cases of market failure such as financial bubbles. In a further study, Kahneman and Riepe (1998) noted that the human mind is always looking for patterns (patterns), causes, coherent stories and is strongly focused on adopting the hypothesis that a random factor may be present behind any sequence remarkable of events. Consequently, investors tend to over-interpret random patterns and are unlikely to persist over time. They react to recent events and their own experiences without paying enough attention to events that have not been directly experienced or preserved over time.

    Unlike over-reaction, the under-reaction effect occurs when the arrival of new information on a particular security is only partially transferred into purchases / sales and therefore investors under-react to the spread of this information . The prices of the securities, after the emission of new information, tend to move slowly with respect to what would be correct to expect. In general, the under-reaction phenomenon has a shorter time horizon than that of the over-reaction, even if in the long term the prices of securities return to be equal to their fundamental value.
    This sub-reaction of financial agents can be explained by the phenomenon of conservatism analyzed by Edwards (1968). It represents the slow updating of expectations in the face of the arrival of new information. Edwards finds that investors who behave conservatively pay little attention or even ignore information from recent earnings announcements, but cling to their previous beliefs based on past income. Scholars like Fama have tried to demonstrate how the effects of over-reaction and under-reaction within the market are able to compensate themselves and therefore do not constitute a reason to believe the hypothesis of efficiency of the financial markets to be inaccurate. Other important economists such as Barberis, Shleifer and Vishny (1997) have tried to develop models capable of explaining the behavior of financial agents. They believe that these traders' attitudes are dictated by the statistical weight (statistical weight) and strength (strength) of the announcements with which new information is provided. Under high-weight announcements (that is, information that has an important statistical relevance), but with reduced strength, under-reaction phenomena usually occur, while in the opposite situation it is usual to be faced with over-reaction of investors. Furthermore, Barberis, Shleifer and Vishny generally believe that in the case of under-reaction the expected value of future returns obtained following positive news is greater than that obtained for bad news, while in the case of over-reaction, the expected value of the returns deriving from a series of good news is lower than that following a series of negative news.

    Barberis, Shleifer e Vishny (1997) A model of investor sentiment. Journal of Financial Economics 49 (1998) 307343
    De Bondt W. Thaler R. (1985). Does the stock market overreact? The Journal of Finance
    Vol. 40, No. 3
    Edwards W. (1968). Conservatism in human information processing. In Formal representation of human judgment, Wiley.
    Kahneman D., Tversky A.(1974). Judgement under uncertainty: Heuristics and Biases. Science, 185(4157), 1124-1131.
    Kahneman D., Riepe M.(1998). The Psychology of non-Professional Investor. The Journal of Portfolio. Management, 24, 52-65.


    The trading of financial securities can take place Over The Counter (OTC), i.e. out of regulated stock exchanges, but only between professional investors, who should be fully aware of potential risks of their trading. OTC trading is not standardised (maturity, min-max quantity, payment method, termination) and the two parties should agree on all contractual terms for the transaction to be valid. After 1990 Alternative Trading Systems (ATS) offered by financial providers, like Reuters and Bloomberg, have taken the lead; in the ATS, the operator creates a page with all the details of the transaction. The pricing and details of this transaction can be seen by any other Reuter-Bloomberg user, who can underwrite the transaction and accept the conditions. After confirmation, the system sends a scheme with all contractual terms. Codes of conduct are widely used and describe the terms of OTC purchase, they originate from the navy and religious codes.
    The volume of transactions on OTC markets is far bigger than that on exchange traded markets, thanks to the greater freedom left to the parties involved, that able to meet their special needs (see BIS statistics at http://www.bis.org/statistics/derstats.htm). The risks connected with such transactions seem to be not a direct source of losses.


    Hull J. (2008) Options, futures and other derivatives, Prentice Hall.
    Oldani C. (2008) Governing Global Derivatives, Ashgate, London.

    © 2018 ASSONEBB


    OTC (Over-the-Counter) trading is a non-regulated manner in which financial instruments are traded directly between two parties. The markets, for any kind of asset, are a combination of non-regulated and regulated exchange.
    The listing on a non-regulated market (OTC) still takes place according to the demand/supply rule. Due to the non-standardisation feature of this type of market, the return is not always strictly correlated with the official exchange. OTC should not be confused with private exchanges between banks and their clients (this market is known as Organised Exchange Systems).
    One of the most common assets traded on the OTC market is the forward contract, which is non-standardised with respect to the futures contract. The main difference between the two is that futures are standardised on the basis of the market on which they take place (for example, see margin requirements), while forwards are non-standard contracts that are not traded on organised exchanges. One of the most famous OTC markets is the NASDAQ. Set up as an OTC market (named NASD), most trading on the NASDAQ is fully regulated (see Stock Market). OTC markets are utilised both for high volume trading between institutional investors and for very low volume transactions.
    Trading is carried out in an informal manner, through bilateral conversations between the agents (demand and supply) either by phone, fax or other form of data transmission.
    With respect to official Exchanges such as the MOT (Fixed Income: Treasury bond/Bill … private bond), the OTC market does not require any formal admission for individuals (there are no primary dealers or specialists), no rules on market mechanisms (such as market margin or maintenance margin), no trading book where bids are listed and ordered by price and volume. Moreover, no information is required from the issuer to trade assets.


    Ciciretti, R., Trenta, U., 2006, La Borsa Europea. Una Visione d’Insieme, in Rapporto sul Sistema Finanziario Italiano 2006, ARACNE, Roma

    Editor: Rocco CICIRETTI

    © 2009 ASSONEBB


    In Behavioral Finance it is observed that often individuals make mistakes in their decisions. Two of the most important phenomena analyzed in behavioral finance are overconfidence and under-confidence

    Overconfidence occurs when individuals have excessive security and confidence in their judgment, knowledge and skills. They believe they can exploit all the information they are aware of, overestimating this information and increasing their self-esteem, if their decisions are confirmed at a specific event, attributing this positive result to their abilities. A consequence of over-confidence is an excessive trading activity that often leads to sub-optimal performance. In this regard, Barber and Odean (2000) conducted a study on 78,000 investors from a brokerage firm. The theorists have divided investors into five groups based on trading frequency and have observed that the group's most frequent annual return is around 6% less, net of transaction costs, of the group that trades less frequently . According to Barber and Odean, the low performance of the high level of trading can be explained by the error due to the too much confidence of the individual investor, which leads him to excessive trading. Investors fail to learn from mistakes made in the past and do not tend to correct them over time, but it usually happens that, faced with a substantial loss, regret aversion causes investors to justify the mistake made as a consequence of external factors and causes, unlike when decisions prove to be profitable.

    Barberis and Thaler (2003) believe that the attitude of overconfidence generates in individuals too narrow confidence intervals that do not correspond to reality with regard to their estimates, since people underestimate the probability of error of their own evaluations. Furthermore, these people are often led to distort the likelihood of an event occurring, not taking into account the fact that external events occur more frequently than is expected. For example, an event with an 80% probability of realization is estimated as certain and an event with a 20% probability of realization is evaluated as impossible. The phenomenon of overconfidence does not only occur in the financial sphere, but also in legal, engineering or psychology sectors. Within the financial sector it can be used to explain numerous phenomena such as the existence of speculative bubbles or the large number of trades that can occur on a given security. It has been observed that overconfidence occurs more in males than in females and in young age, while it tends to decrease with the passage of time, as individuals with the acquisition of a wider experience develop a process assessment of one's abilities which is more objective. Moreover, empirical evidence has found that this phenomenon is more widespread in activities that do not offer immediate feedback and in those that require theoretical analysis rather than mechanical performance. Overconfidence is an orientation belonging to human nature and is a much more relevant and widespread phenomenon than under-confidence, which is the opposite attitude. Under-confidence occurs when investors show a lack of confidence in the reliability of their forecasts and often tend to underestimate their abilities. This lack of trust can occur especially in situations where the choice to be made is highly complicated or doubtful. These investors renounce making such choices, attributing very low probability of success. For this reason they are inclined to carry out conservative attitudes and to slowly adjust forecasts with the arrival of new information. The phenomena of overconfidence and under-confidence must not be confused with the terms of optimism and pessimism, in fact the excess or lack of confidence in one's choices does not necessarily imply optimism or pessimism about market prospects.

    Barber B., Odean T. (2000). Trading is hazardous to your wealth: the common stock performance of individual investors. Quarterly Journal of Economics, 116, pp. 261-292.
    Barberis N., Thaler, R. (2003). A Survey of Behavioral Finance. Handbook of the Economics of Finance, Vol. 1B, Financial Markets and Asset Pricing. Elsevier North Holland.


    It is an explicit agreement whereby a creditor makes available funds, which exceed the current balance in the checking account (overdraw) up to a specified limit (the overdraft limit), to a consumer with a check account at a bank or building society. This arrangement allows flexible short-term borrowing because the borrower’s only constraint is the stated limit. The bank can charge some percentage points over the interest rate on the daily debt balance, or it can offer an arrangement fee. For example, if the consumer makes a purchase with a debit card for $150 but he/she only has $100 in the account, the account will be overdrawn by $50 and the bank may charge a fee or can charge two percentage points over the base rate only on the daily outstanding balance. This is a costly way of borrowing, but when the consumer is a risky borrower (according to its creditworthiness, security offered and bargaining position), overdraft facilities may be the most convenient source of funding. The bank can retain the right to withdraw the facility at short notice after informing the consumer.
    Link: http://www.federalreserve.gov/consumerinfo/wyntk_overdraft.htm

    Arnold G. (2002), Corporate Financial Management, Pearson Education
    © 2010 ASSONEBB


    The use of a person’s own capital to fund a transaction.

    ©2012 Editor: House of Lords


    A person or firm’s own resources.

    ©2012 Editor: House of Lords

Selected letter: O English version

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