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Encyclopedia > Black Monday (1987)

In financial markets, Black Monday is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) dropped by over 500 points (about 25%), and on which similar enormous drops occurred across the world. 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 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.) Dow Jones (19-Jul-1987 through 19-Jan-1988). ... Dow Jones (19-Jul-1987 through 19-Jan-1988). ... Linear graph of the DJIA from 1901 until today Logarithmic graph of the DJIA from 1901 until today The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, or informally the Dow Jones or The Dow) is one of several stock market indices created by nineteenth-century... is the 200th day of the year (201st in leap years) in the Gregorian calendar. ... Year 1987 (MCMLXXXVII) was a common year starting on Thursday (link displays 1987 Gregorian calendar). ... is the 19th day of the year in the Gregorian calendar. ... Year 1988 (MCMLXXXVIII) was a leap year starting on Friday (link displays 1988 Gregorian calendar). ... FTSE 100 Index ( 19 July 1987 through 19 January 1988) I, the creator of this image, hereby release it into the public domain. ... FTSE 100 Index ( 19 July 1987 through 19 January 1988) I, the creator of this image, hereby release it into the public domain. ... The FTSE 100 Index (or just the FTSE, pronounced footsie) is a share index of the 100 most highly capitalised companies listed on the London Stock Exchange. ... is the 200th day of the year (201st in leap years) in the Gregorian calendar. ... Year 1987 (MCMLXXXVII) was a common year starting on Thursday (link displays 1987 Gregorian calendar). ... is the 19th day of the year in the Gregorian calendar. ... Year 1988 (MCMLXXXVIII) was a leap year starting on Friday (link displays 1988 Gregorian calendar). ... This article does not cite any references or sources. ... is the 292nd day of the year (293rd in leap years) in the Gregorian calendar. ... Year 1987 (MCMLXXXVII) was a common year starting on Thursday (link displays 1987 Gregorian calendar). ... Linear graph of the DJIA from 1901 until today Logarithmic graph of the DJIA from 1901 until today The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, or informally the Dow Jones or The Dow) is one of several stock market indices created by nineteenth-century... is the 301st day of the year (302nd in leap years) in the Gregorian calendar. ... Year 1929 (MCMXXIX) was a common year starting on Tuesday (link will display the full calendar) of the Gregorian calendar. ... Crowd gathering on Wall Street. ... is the 297th day of the year (298th in leap years) in the Gregorian calendar. ... The 1929 stock market crash devastated economies worldwide The Wall Street Crash refers to the stock market crash that occurred on October 29, 1929, when share prices on the New York Stock Exchange collapsed, leading eventually to the Great Depression. ...


The Black Monday decline was the largest one-day percentage decline in stock market history. Other large declines have occured after periods of market closure, such as Saturday, December 12, 1914, when the DJIA fell 24.39%, ending the closure due to the outbreak of the First World War, and Monday, September 17, 2001, the first day after which the market was open following the September 11, 2001 attacks. A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... is the 346th day of the year (347th in leap years) in the Gregorian calendar. ... Year 1914 (MCMXIV) was a common year starting on Thursday (link will display the full calendar) of the Gregorian calendar (or a common year starting on Wednesday of the 13-day-slower Julian calendar). ... Ypres, 1917, in the vicinity of the Battle of Passchendaele. ... is the 260th day of the year (261st in leap years) in the Gregorian calendar. ... Year 2001 (MMI) was a common year starting on Monday (link displays the 2001 Gregorian calendar). ... A sequential look at United Flight 175 crashing into the south tower of the World Trade Center The September 11, 2001 attacks (often referred to as 9/11—pronounced nine eleven or nine one one) consisted of a series of coordinated terrorist[1] suicide attacks upon the United States, predominantly...


A degree of mystery is associated with the 1987 crash, currently referred to in the world of finance as a black swan event. Many have noted that no major news or events occurred prior to the Monday of the crash, the decline seeming to have come from nowhere. 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. In Nassim Nicholas Talebs definition, a black swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. ... Irrational exuberance is a phrase used by Federal Reserve Board Chairman Alan Greenspan in a speech given during the stock market boom of the 1990s. ... In finance, the efficient market hypothesis (EMH) asserts that financial markets are informationally efficient, or that prices on traded assets, e. ... Price of market balance In economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the abscence of external shocks the (equilibrium) values of economic variables will not change. ...


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. This also gave the Federal Reserve and other central banks time to pump liquidity into the system to prevent a further downdraft. While pessimism reigned, the market bottomed on October 20, leading some to label Black Monday a "selling climax", where the excess value was squeezed out of the system. The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ... Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... is the 293rd day of the year (294th in leap years) in the Gregorian calendar. ...

Contents

Causes

Timeline compiled by the Federal Reserve.

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 stock market advanced significantly, peaking in August 1987 at 2722 points, or 44% over 1986 closing at 1985 points. There were a series of volatile days leading up to the crash. Image File history File links Size of this preview: 800 × 462 pixelsFull resolution (1168 × 674 pixel, file size: 21 KB, MIME type: image/png) Source: US Federal Reserve [1] File historyClick on a date/time to view the file as it appeared at that time. ... Image File history File links Size of this preview: 800 × 462 pixelsFull resolution (1168 × 674 pixel, file size: 21 KB, MIME type: image/png) Source: US Federal Reserve [1] File historyClick on a date/time to view the file as it appeared at that time. ... The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC. The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ...


Potential causes for the decline include program trading, overvaluation, illiquidity, and market psychology. These theories have only partial success in explaining why the market fell so far and fast, why the drop was international in nature and not unique to American markets, and, especially, why the crash occurred on October 19 and not some other day. Program trading is casually defined as the use of computers in stock markets to engage in arbitrage and portfolio insurance strategies. ... Valuation is the process of estimating the value of an asset (liability). ... Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ... is the 292nd day of the year (293rd in leap years) in the Gregorian calendar. ...


The most popular explanation for the 1987 crash was selling by program traders.[1] U.S. Congressman Edward J. Markey, who had been warning about the possibility of a crash, stated that "Program trading was the principal cause." [2] Program trading is the use of computers to engage in arbitrage and portfolio insurance strategies. Through the 1970s and early 1980s, computers were becoming more important on Wall Street. They allowed instantaneous execution of orders to buy or sell large batches of stocks and futures. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline. 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. Either way, program trading ended up taking the majority of the blame in the public eye for the 1987 stock market crash. Edward John Markey (born July 11, 1946), American politician, has been a Democratic member of the United States House of Representatives since 1976, representing the 7th District of Massachusetts. ... Program trading is casually defined as the use of computers in stock markets to engage in arbitrage and portfolio insurance strategies. ... In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. ... Elaborate marble facade of NYSE as seen from the intersection of Broad and Wall Streets For other uses, see Wall Street (disambiguation). ... For other uses, see Stock (disambiguation). ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... Alan Greenspan, former chairman, United States Federal Reserve. ... Speculation involves the buying, holding, and selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. ...


Economist Richard Roll believes the international nature of the stock market decline contradicts the argument that program trading was to blame. 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. Richard W. Dick Roll (born October 31, 1939) is an American economist, best known for his work on portfolio theory and asset pricing, both theoretical and empirical. ... is the 292nd day of the year (293rd in leap years) in the Gregorian calendar. ... For other uses, see Europe (disambiguation). ...


Another common theory states that the crash was a result of a dispute in monetary policy between the G-7 industrialized nations, in which the United States, wanting to prop up the dollar and restrict inflation, tightened policy faster than the Europeans. The crash, in this view, was caused when the dollar-backed Hong Kong stock exchange collapsed, and this caused a crisis in confidence.[citation needed]Jude Wanniski stated that the crash happened because of the breakup of the Louvre Accord, a monetary pact between the US, Japan, and West Germany to keep currencies stable. Just prior to the crash, Alan Greenspan had said that the dollar would be devalued.[citation needed] 1983 G-7 Economic Summit in Williamsburg, Virginia (left to right) Pierre Trudeau, Gaston Thorn, Helmut Kohl, François Mitterrand, Ronald Reagan, Yasuhiro Nakasone, Margaret Thatcher, Amintore Fanfani. ... It has been suggested that Two Santa Claus Theory be merged into this article or section. ... The Louvre Accord was signed by the then G6 (France, West Germany, Japan, Canada, the United States and the United Kingdom) on February 22, 1987 in Paris, France. ... Alan Greenspan (born March 6, 1926 in New York City) is an American economist and was Chairman of the Board of Governors of the Federal Reserve of the United States from 1987 to 2006. ...


Another theory is that the Great Storm of 1987 in England, which happened on the Friday before the crash, helped contribute to it. In 1987 there was no Internet trading, and brokers had to physically get to work in the City of London in order to do their deals. On Friday, October 16, many routes into London were closed and consequently many traders were unable to reach their offices in order to close their positions at the end of the week. This presumably caused panic selling the following Monday. Satellite image of the powerful storm The Great Storm of 1987 occurred on October 15 and 16, 1987, when an unusually strong weather system caused hurricane force winds to hit much of the south of England. ... This article is about the capital of England and the United Kingdom. ... is the 289th day of the year (290th in leap years) in the Gregorian calendar. ...


Impact on popular culture

With the dramatic price decline, there was public concern of an upcoming economic depression would soon strike the world economy as it did with the stock market crash in 1929. In economics, a depression is a term commonly used for a sustained downturn in the economy. ...


See also

Satellite image of the powerful storm The Great Storm of 1987 occurred on October 15 and 16, 1987, when an unusually strong weather system caused hurricane force winds to hit much of the south of England. ... Program trading is casually defined as the use of computers in stock markets to engage in arbitrage and portfolio insurance strategies. ...

Further reading

  • "Brady Report" Presidential Task Force on Market Mechanisms (1988): Report of the Presidential Task Force on Market Mechanisms. Nicholas F. Brady (Chairman), U.S. Government Printing Office.
  • Carlson, Mark (2007) "A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response," Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C.
  • Securities and Exchange Commission (1988): The October 1987 Market Break. Washington: The Securites and Exchange Commission.
  • Shiller, R. (1989): “Investor Behavior in the October 1987 Stock Market Crash: Survey Evidence,” in Market Volatility. Boston: Massachusetts Institute of Technology.
  • Robert Sobel Panic on Wall Street: A Classic History of America's Financial Disasters-With a New Exploration of the Crash of 1987 (E P Dutton; Reprint edition, May 1988) ISBN 0-525-48404-3.

Nicholas F. Brady Bradys signature, as used on American currency Nicholas Frederick Brady (born April 11, 1930, in New York City) was United States Secretary of the Treasury under Presidents Ronald Reagan and George H. W. Bush, and is also known for articulating the Brady Plan in March 1989. ... Robert Sobel in a promotional photo for his publisher. ... Year 1988 (MCMLXXXVIII) was a leap year starting on Friday (link displays 1988 Gregorian calendar). ...

References

  1. ^ The Concise Encyclopedia of Economics, "Program Trading," by Dean Furbush accessed May 22, 2007
  2. ^ Albert, Bozzo (10-12-2007). Players replay the crash. Remembering the Crash of 87. CNBC. Retrieved on 10-13-2007.

External links

  • Motley Fool's Black Monday 10th Anniversary 1987 Timeline
  • CNBC Remembering the Crash of 1987
  • Black Monday 1987
  • CBC Reports on Black Monday
Black days of the week
Black Sunday | Black Monday | Black Tuesday | Black Wednesday | Black Thursday | Black Friday | Black Saturday

  Results from FactBites:
 
Black Monday - Wikipedia, the free encyclopedia (321 words)
Black Monday, Malta, 15 October 1979 - the offices of the Times of Malta were set on fire during a political rally.
Black Monday, Dublin, 1209 - occurred on when a group of 500 recently arrived settlers from Bristol were massacred by warriors of the gaelic O'Byrne clan.
Black Monday may also refer to the day after the last regular season game during a football season, where coaches that did not live up to expectations are usually fired.
Black Monday (1987) - Wikipedia, the free encyclopedia (1114 words)
Black Monday is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) fell 22.6%.
The Black Monday one-day decline was not confined to the United States but was mirrored all over the world.
The Black Monday decline was the second largest one-day percentage decline in stock market history.
  More results at FactBites »

 
 

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