Liquidity and the 1987 stock market crash
In financeBlack Monday refers to Monday, October 19,when stock markets around the world crashed. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already sustained significant declines.
The terms Black Monday and Black Tuesday are also respectively applied to October 28 and October 29,which occurred after Black Thursday on October 24, which started the Stock Market Crash of this also happened in while the president was in office. In late and earlythe United States economy shifted from a rapid recovery from the early s recession to a slower expansion, resulting in a brief " soft landing " period as the economy slowed and inflation dropped.
The next morning, Iran hit another ship, the U. Then- Treasury Secretary James Baker stated concerns about the falling prices. The crash began in Far Eastern markets the morning of October 19, but accelerated in London time—largely because London had closed early on October 16 due to the storm—by 9. Later that morning, two U.
By the end of October, liquidity and the 1987 stock market crash markets had fallen in Hong Kong liquidity and the 1987 stock market crash Saturday, December 12,is sometimes erroneously cited as the largest one-day percentage decline of the DJIA.
In reality, the ostensible decline of Following the liquidity and the 1987 stock market crash market crash, a group of 33 eminent economists from various nations met in Washington, D. Possible causes for the decline included program tradingovervaluationilliquidity and market psychology. A popular explanation for the crash was computerized selling dictated by portfolio insurance hedges.
Common strategies implemented by program trading involve an attempt to engage in arbitrage and portfolio insurance strategies.
As computer technology became widespread, program trading grew dramatically within Wall Street firms. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline.
Some economists theorized the liquidity and the 1987 stock market crash boom leading up to October was caused by program trading, and that the crash was merely a return to normalcy. Either way, program trading ended up taking the majority of the blame in the public eye for the stock market crash. Markeywho had been warning about the possibility of a crash, stated that "Program trading was the principal cause.
New York University 's Richard Sylla divides the causes into macroeconomic and internal reasons. Macroeconomic causes included international disputes about foreign exchange and interest rates, and fears about inflation. The internal reasons included innovations with index futures and portfolio insurance.
I've seen accounts that maybe roughly half the trading on that day was a small number of institutions with portfolio insurance. Big guys were dumping their stock.
Also, the futures market in Chicago was even lower than the stock market, and people tried to arbitrage that. The proper strategy was to buy futures in Chicago and sell in the New York cash market. After Black Monday, regulators overhauled trade-clearing protocols to bring uniformity to all prominent market products. They also developed new rules, known as " trading curbs " or colloquially as circuit breakers, allowing exchanges to temporarily halt trading in instances of exceptionally large price declines in some indexes; for instance, the DJIA.
From Wikipedia, the free encyclopedia. The Wall Street Journal. Archived from the original on Stock exchange, New Zealand Official Yearbook ". Retrieved 8 December Bulls, Bears and Elephants: Retrieved 18 July The New York Times.
Concise Encyclopedia of Economics 1st ed. Library of Economics and Liberty. The precipitous price declines occurred when the normal index-arbitrage relation was most disrupted, not when index arbitrage was prevalent. Remembering the Crash of A Discussion With Richard Sylla".
The Wall Street Journal Online. The Stock Market Crash of ". Retrieved 31 July Early stock market crashes in the Dutch Republic. Panic of Panic of Depression of —21 Wall Street Crash of Recession of —38 Brazilian markets crash —74 stock market crash Souk Al-Manakh stock market crash Japanese liquidity and the 1987 stock market crash price bubble — Black Monday Rio de Janeiro Stock Exchange collapse Friday the 13th mini-crash s Japanese stock market crash Dot-com bubble — Asian financial crisis October 27,mini-crash Russian financial crisis.
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