Stock Market Crash of 1987


Overview

In finance, Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong, spread west through international time zones t
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Stock Brokers at the NYSE
o Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average dropped by 508 points to 1738.74. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover.[1] A degree of mystery is associated with the 1987 crash, and it has been labeled as a black swan event. Important assumptions concerning human rationality the efficient market hypothesis, and economic equilibrium were brought into question by the event. Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached.

Central Issue

In 1986, the United States economy began shifting from a rapidly growing recovery to a slower growing expansion. The stock market advanced significantly, with the Dow peaking in August 1987 at 2722 points, or 44% over the previous year's closing of 1895 points. On October 14, the DJIA dropped 95.46 points to 2412.70, and fell another 58 points the next day, down over 12% from the August 25 all-time high. On Friday, October 16, the DJIA closed down another 108.35 points to close at
Dow Jones Index
Dow Jones Index
2246.74 on record volume.[2] Treasury Secretary James Baker stated concerns about the falling prices. That weekend many investors worried over their stock investments. The Black Monday decline was the largest one-day percentage decline in stock market history. Other large declines have occurred after periods of market closure, such as, in the USA, on Monday, September 17, 2001, the first day that the US market was open following the September 11, 2001 attacks.

Conclusion

Potential causes for the decline include program trading, overvaluation, illiquidity, and market psychology. The most popular explanation for the 1987 crash was selling by program traders. U.S. Congressman Edward J. Markey, who had been warning about the possibility of a crash, stated that "Program trading was the principal cause." Economist Richard Roll believes the international nature of the stock market decline contradicts the argument that program trading wa
Time Magazine on the 1987 Crash
Time Magazine on the 1987 Crash
s to blame.[3] Program trading strategies were used primarily in the United States, Roll writes. Markets where program trading was not prevalent, such as Australia and Hong Kong, would not have declined as well, if program trading was the cause. These markets might have been reacting to excessive program trading in the United States, but Roll indicates otherwise. The crash began on October 19 in Hong Kong, spread west to Europe, and hit the United States only after Hong Kong and other markets had already declined by a significant margin.[4] Another common theory states that the crash was a result of a dispute in monetary policy between the G7 industrialized nations, in which the United States, wanting to prop up the dollar and restrict inflation, tightened policy faster than the Europeans.



Referances(2009-10.1.2.D)


  1. ^ "What Caused the Stock Market Crash of 1987?" History News Network. Web. 15 Dec. 2009. <http://hnn.us/articles/895.html>.
  2. ^ "Market Crashes: The Crash of 1987." Welcome to Investopedia.com. Web. 14 Dec. 2009. <http://www.investopedia.com/features/crashes/crashes6.asp>.
  3. ^ "Markets - 1987 Stock Market Crash Page." Lope. Web. 15 Dec. 2009. <http://www.lope.ca/markets/1987crash/>.
  4. ^ "What Caused the Stock Market Crash of 1987?" History News Network. Web. 15 Dec. 2009. <http://hnn.us/articles/895.html>.