Black Monday (1987)

Important assumptions concerning human rationality, the efficient market hypothesis, and economic equilibrium were brought into question by the event. 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. 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.

Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached. In the wake of the crash, markets around the world were put on restricted trading primarily because sorting out the orders that had come in was beyond the computer technology of the time. Treasury Secretary James Baker stated concerns about the falling prices.

In Australia and New Zealand the 1987 crash is also referred to as Black Tuesday because of the timezone difference.) The Black Monday decline was the largest one-day percentage decline in stock market history. (The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929.

Also, the futures market in Chicago was even lower than the stock market, and people tried to arbitrage that. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline.

The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. 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.

The crash, in this view, was caused when the dollar-backed Hong Kong stock exchange collapsed, and this caused a crisis in confidence. 1796–1797 panic • 1819 panic • 1837 panic • 1857 panic • Black Friday • 1873 panic • 1882 Paris Bourse crash • 1884 panic • 1893 panic • 1896 panic • 1901 panic • 1907 panic • 1929 Wall Street crash • 1937–1938 recession • 1973–1974 stock market crash • Silver Thursday • Souk Al-Manakh stock market crash • Black Monday • Friday the 13th mini-crash • Japanese asset price bubble • Black Wednesday • 1997 Asian financial crisis • 1997 mini-crash • 1998 Russian financial crisis • dot-com bubble • September 11 • 2002 stock market downturn • Chinese correction • 2007–2009 United States bear market List of stock market crashes . These markets might have been reacting to excessive program trading in the United States, but Roll indicates otherwise.

It opened on January 2, 1987, at 1,897 points and would close on December 31, 1987, at 1,939 points. 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.

flagged ship MV Sea Isle City. 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.

warships shelled an Iranian oil platform in the Persian Gulf in response to Iran s Silkworm missile attack on the U.S. The proper strategy was to buy futures in Chicago and sell in the New York cash market.

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 Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%). 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%.

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 (a then record) to 2412.70, and fell another 58 points the next day, down over 12% from the August 25 all-time high. It made it hard -- the portfolio insurance people were also trying to sell their stock at the same time. Economist Richard Roll believes the international nature of the stock market decline contradicts the argument that program trading was to blame.

This also gave the Federal Reserve and other central banks time to pump liquidity into the system to prevent a further downdraft. New Zealand s market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover.

I ve seen accounts that maybe roughly half the trading on that day was a small number of institutions with portfolio insurance. Some economists theorized the speculative boom leading up to October was caused by program trading, while others argued that the crash was a return to normalcy.

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. As computer technology became more available, the use of program trading grew dramatically within Wall Street firms. in December 1987, and collectively predicted that “the next few years could be the most troubled since the 1930s.” In 1986, the United States economy began shifting from a rapidly growing recovery to a slower growing expansion, which resulted in a soft landing as the economy slowed and inflation dropped.

The DJIA did not regain its August 25, 1987 closing high of 2,722 points until almost two years later. A degree of mystery is associated with the 1987 crash, and it has been labeled as a black swan event. That weekend many investors worried over their stock investments. The crash began in Far Eastern markets the morning of October 19.

On Friday, October 16, the DJIA closed down another 108.35 points to close at 2246.74 on record volume. Later that morning, two U.S.

While pessimism reigned, the DJIA bottomed on October 20. Following the stock market crash, a group of 33 eminent economists from various nations met in Washington, D.C. Program trading strategies were used primarily in the United States, Roll writes.

Big guys were dumping their stock. (Saturday, December 12, 1914, is sometimes erroneously cited) Interestingly, the DJIA was positive for the 1987 calendar year.

Either way, program trading ended up taking the majority of the blame in the public eye for the 1987 stock market crash. New York University s Richard Sylla divides the causes into macroeconomic and internal reasons.