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Encyclopedia > Stock market crash

A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles. If Stock market crashes are social phenomena where external economic events combine with crowd behaviour and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions[citation needed]: a prolonged period of rising stock prices and excessive economic optimism, a market where P/E ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants. For other uses, see Stock (disambiguation). ... 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. ... 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. ... A stock market bubble is a type of economic bubble taking place in stock markets when price of stocks rise and become overvalued by any measure of stock valuation. ... Social phenomena include all behavior which influences or is influenced by organisms sufficiently alive to respond to one another. ... Crowd psychology is a branch of social psychology. ... Positive feedback is a feedback system in which the system responds to the perturbation in the same direction as the perturbation (It is sometimes referred to as cumulative causation). ... “Positive Attitude” redirects here. ... In finance, the PE ratio of a stock (also called its earnings multiple, just multiple, or P/E) is calculated as: The price per share (numerator) is the market price of a single share of the stock. ... The term margin has many meanings: In telecommunication, margin has the following meanings: In communications systems, the maximum degree of signal distortion that can be tolerated without affecting the restitution, without its being interpreted incorrectly by the decision circuit. ...

There is no numerically-specific definition of a crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days. Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. The crash of 1987 for example did not lead to a bear market. Likewise, the Japanese Nikkei bear market of the 1990s occurred over several years without any notable crashes. A comparison of three major stock indices: the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500. ... Bull and bear statues in front of the Frankfurt Stock Exchange In investing, financial markets are commonly believed to have market trends that can be classified as primary trends, secondary trends (short-term), and secular trends (long-term). ... Nikkei 225 (日経平均株価, 日経225) is a stock market index for the Tokyo Stock Exchange (TSE). ...


Wall Street Crash of 1929

On Black Tuesday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the ticker tape system that normally gave investors the current prices of their shares. Telephone lines and telegraphs were clogged and were unable to cope. This information vacuum only led to more fear and panic. The technology of the New Era, much celebrated by investors previously, now served to deepen their suffering. Stock Ticker working replica Ticker tape was used by ticker tape machines, the Ticker tape timer, stock ticker machines, or just stock tickers. ... A telephone line (or just line) is a single-user circuit on a telephone communications system. ...

Black Tuesday was a day of chaos. Forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders. The glamour stocks of the age saw their values plummet. Across the two days, the Dow Jones Industrial Average fell 23%. A margin call is the demand, in a margin account, for additional funds, additional money or securities, to be deposited into the account. ...

By the end of the week of November 11, the index stood at 228, a cumulative drop of 40 percent from the September high. The markets rallied in succeeding months but it would be a false recovery that led unsuspecting investors into the worst economic crisis of modern times. is the 315th day of the year (316th in leap years) in the Gregorian calendar. ... In economics, crisis is an old term in business cycle theory, referring to the sharp transition to a recession. ...

Although it is popularly believed that the Crash inflicted heavy financial loss on investors during this period, the Great Depression which followed was far more terrible. While the Crash dealt a severe blow to many a stockholder's portfolio, the Great Depression brought obliteration and bankruptcy. Before it was over, the Dow Jones Industrial Average would lose 89% of its value before finally bottoming out in July 1932. For other uses, see The Great Depression (disambiguation). ...

This was a very dramatic time for the 1920's. It led into the Great Depression.

The Crash of 1987

Main article: Black Monday (1987)

The mid-1980s were a time of strong economic optimism. From August 1982 to its peak in August 1987, the Dow Jones Industrial Average (DJIA) grew from 776 to 2722. The rise in market indices for the 19 largest markets in the world averaged 296 percent during this period. The average number of shares traded on the NYSE had risen from 65 million shares to 181 million shares.[1] DJIA (19 July 1987 through 19 January 1988). ...

The crash on October 19, 1987, a date that is also known as Black Monday, was the climactic culmination of a market decline that had begun five days before on October 14th. The DJIA fell 3.81 percent on October 14, followed by another 4.60 percent drop on Friday October 16th. But this was nothing compared to what lay ahead when markets opened on the subsequent Monday. On Black Monday, the Dow Jones Industrials Average plummeted 508 points, losing 22.6% of its value in one day. The S&P 500 dropped 20.4%, falling from 282.7 to 225.06. The NASDAQ Composite lost only 11.3% not because of restraint on the part of sellers but because the NASDAQ market system failed. Deluged with sell orders, many stocks on the NYSE faced trading halts and delays. Of the 2,257 NYSE-listed stocks, there were 195 trading delays and halts during the day. [2] The NASDAQ market fared much worse. Because of its reliance on a "market making" system that allowed market makers to withdraw from trading, liquidity in NASDAQ stocks dried up. Trading in many stocks encountered a pathological condition where the ask price for a stock exceeded the bid price. These "locked" conditions severely curtailed trading. On October 19th, trading in Microsoft shares on the NASDAQ lasted a total of 54 minutes. 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). ... DJIA (19 July 1987 through 19 January 1988). ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ... NASDAQ in Times Square, New York City. ... A market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. ... A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the bid/offer spread. ... Ask price, also called offer price, is a price a seller of a good is willing to accept for that particular good. ... A bid price is a price offered by a buyer/bidder when he buys a good. ... Microsoft Corporation, (NASDAQ: MSFT, HKSE: 4338) is a multinational computer technology corporation with global annual revenue of US$44. ...

The Crash was the greatest single-day loss that Wall Street had ever suffered in continuous trading up to that point. Between the start of trading on October 14th to the close on October 19, the DJIA lost 760 points, a decline of over 31 percent.

The 1987 Crash was a worldwide phenomenon. The FTSE 100 Index lost 10.8% on that Monday and a further 12.2% the following day. In the month of October, all major world markets declined substantially. The least affected was Austria (a fall of 11.4%) while the most affected was Hong Kong with a drop of 45.8%. Out of 23 major industrial countries, 19 had a decline greater than 20%.[3] 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. ...

Despite fears of a repeat of the 1930s Depression, the market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22. It took only two years for the Dow to recover completely; by September of 1989, the market had regained all of the value it had lost in the 1987 crash.

No definitive conclusions have been reached on the reasons behind the 1987 Crash. Stocks had been in a multi-year bull run and market P/E ratios in the U.S. were above the post-war average. The S&P 500 was trading at 23 times earnings, a postwar high and well above the average of 14.5 times earnings.[4] Herd behavior and psychological feedback loops play a critical part in all stock market crashes but analysts have also tried to look for external triggering events. Aside from the general worries of stock market overvaluation, blame for the collapse has been apportioned to such factors as program trading, portfolio insurance and derivatives, and prior news of worsening economic indicators (i.e. a large U.S. merchandise trade deficit and a falling U.S. dollar which seemed to imply future interest rate hikes).[5] The P/E ratio (price-to-earnings ratio) of a stock (also called its earnings multiple, or simply multiple, P/E, or PE) is used to measure how cheap or expensive its share price is. ... It has been suggested that Herding instinct be merged into this article or section. ... For other uses, see Feedback (disambiguation). ... Program trading is casually defined as the use of computers in stock markets to engage in arbitrage and portfolio insurance strategies. ... Dynamic asset allocation is a strategy used by investment products such as hedge funds, mutual funds, credit derivatives, index funds, principal protected notes (also known as guaranteed linked notes) and other structured investment products to achieve exposure to various investment opportunities and provide 100% principal protection. ... Derivatives traders at the Chicago Board of Trade. ... An economic indicator (or business indicator) is a statistic about the economy. ... The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going through the Panama Canal. ... USD redirects here. ...

One of the consequences of the 1987 Crash was the introduction of the circuit breaker or trading curb on the NYSE. Based upon the idea that a cooling off period would help dissipate investor panic, these mandatory market shutdowns are triggered whenever a large pre-defined market decline occurs during the trading day. A trading curb is a point at which a stock market will stop trading for a period of time in response to substantial drops in value. ... In Business, the trading day is the time span that a particular stock exchange is open. ...

Mathematical theory of stock market crashes

The mathematical characterisation of stock market movements has been a subject of intense interest. The conventional assumption that stock markets behave according to a random Gaussian or normal distribution is incorrect. Large movements in prices (i.e. crashes) are much more common than would be predicted in a normal distribution. Research at the Massachusetts Institute of Technology shows that there is evidence that the frequency of stock market crashes follow an inverse cubic power law.[6] This and other studies suggest that stock market crashes are a sign of self-organized criticality in financial markets. In 1963, Benoît Mandelbrot proposed that instead of following a strict random walk, stock price variations executed a Lévy flight.[7] A Lévy flight is a random walk which is occasionally disrupted by large movements. In 1995, Rosario Mantegna and Gene Stanley analyzed a million records of the S&P 500 market index, calculating the returns over a five year period.[8] Their conclusion was that stock market returns are more volatile than a Gaussian distribution but less volatile than a Lévy flight. Probability density function of Gaussian distribution (bell curve). ... The normal distribution, also called the Gaussian distribution, is an important family of continuous probability distributions, applicable in many fields. ... “MIT” redirects here. ... See Also: Watt In physics, a power law relationship between two scalar quantities x and y is any such that the relationship can be written as where a (the constant of proportionality) and k (the exponent of the power law) are constants. ... The theory of self-organized criticality (SOC) claims that whenever a self-organizing dynamical system is open or dissipative, it exhibits critical (scale-invariant) behaviour similar to that displayed by static systems undergoing a second-order phase transition. ... Benoît B. Mandelbrot, PhD, (born November 20, 1924) is a Franco-American mathematician, best known as the father of fractal geometry. Benoît Mandelbrot was born in Poland, but his family moved to France when he was a child; he is a dual French and American citizen and was... Example of eight random walks in one dimension starting at 0. ... A Lévy flight, named after the French mathematician Paul Pierre Lévy, is a type of random walk in which the increments are distributed according to a heavy tail distribution. ...

Researchers continue to study this theory, particularly using computer simulation of crowd behaviour, and the applicability of models to reproduce crash-like phenomena. It has been suggested that simulation software be merged into this article or section. ...

External links

  • Every Generation has its Crash
  • Log-periodic power law bubbles in Latin-American and Asian markets and correlated anti-bubbles in Western stock markets: An empirical study.Anders, Sornette. International Journal of Theoretical and Applied Finance 4(6), 853-920(2001).
  • A theory of power-law distributions in financial market fluctuations. Gabaix, Gopikrishnan, Pierou, Stanley. Nature, vol 423. 15 May 2003.
  • The Crash of 1987 A definitive bibliography of articles, books and websites.


  1. ^ Preliminary Observations on the October 1987 Crash, United States General Accounting Office (GAO). January 1988. GAO/GGD-88-38. p.14, p.36
  2. ^ U.S. GAO op. cit. p.55
  3. ^ Critical Market Crashes, D. Sornette. p.6
  4. ^ U.S. GAO op. cit. p.37
  5. ^ - What caused the Stock Market Crash of 1987?
  6. ^ [1]
  7. ^ Mandelbrot, B. (1963) ”The variation of certain speculative prices” Journal of Business, XXXVI, 392-417
  8. ^ Mantegna, R.N., and Stanley, E. 1995. Scaling behaviour in the dynamics of an economic index. Nature 376(July 6):46.

General Accounting Office headquarters, Washington, D.C. The Government Accountability Office (GAO) is the non-partisan audit, evaluation, and investigative arm of Congress, and an agency in the Legislative Branch of the United States Government. ...

Further reading

John Kenneth Galbraith John Kenneth Galbraith (October 15, 1908–April 29, 2006) was an influential Canadian-American economist. ... Charles P. Kindleberger (1910 to July 7, 2003) was a historical economist and author of over 30 books. ... Robert James Bob Shiller (born 1946) is an American economist, academic, and best-selling author. ... This article is about the book by Robert Shiller. ...

See also

  Results from FactBites:
The First Measured Century: Timeline: Events - Stock Market Crash (481 words)
Throughout the twentieth century, most of the capital in the United States was represented by stocks.
The stocks were bought and sold on stock exchanges, of which the most important was the New York Stock Exchange located on Wall Street in Manhattan.
Many investors became convinced that stocks were a sure thing and borrowed heavily to invest more money in the market.
EH.Net Encyclopedia: The 1929 Stock Market Crash (8141 words)
There are good reasons for thinking that the stock market was not obviously overvalued in 1929 and that it was sensible to hold most stocks in the fall of 1929 and to buy stocks in December 1929 (admittedly this investment strategy would have been terribly unsuccessful).
The fact that the stock market lost 90 percent of its value from 1929 to 1932 indicates that the market, at least using one criterion (actual performance of the market), was overvalued in 1929.
In September 1929, the market value of one segment of the market, the public utility sector, should be based on existing fundamentals, and fundamentals seem to have changed considerably in October 1929.
  More results at FactBites »



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