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Rule Breaker Investing: 5 Stocks Rolled Up at Random

Black Monday (1987)
Black Monday Dow Jones.svg
DJIA (June 19, 1987, to January 19, 1988)
DateOctober 19, 1987
TypeStock market crash
Outcome
  • Dow Jones Industrial Average falls 508 points (22.6%), making it the highest one-day drop by percentage in the index's history
  • Federal Reserve provides market liquidity to meet unprecedented demands for credit
  • Dow Jones begins to recover in November 1987
  • NYSE institutes rule regarding trading curbs in 1988
FTSE 100 Index of the London Stock Exchange (June 19, 1987, to January 19, 1988)

Black Monday is the name commonly attached to the global, sudden, severe, and largely unexpected[1] stock market crash on October 19, 1987. In Australia and New Zealand, the day is also referred to as Black Tuesday because of the time zone difference from the United States.

All of the twenty-three major world markets experienced a sharp decline in October 1987. When measured in United States dollars, eight markets declined by 20 to 29%, three by 30 to 39% (Malaysia, Mexico and New Zealand), and three by more than 40% (Hong Kong, Australia and Singapore).[2][A] 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 twenty-three major industrial countries, nineteen had a decline greater than 20%.[3] Worldwide losses were estimated at US$1.71 trillion.[4] The severity of the crash sparked fears of extended economic instability[5] or even a reprise of the Great Depression.[6][clarification needed]

The degree to which the stock market crashes spread to the wider economy (the "real economy") was directly related to the monetary policy each nation pursued in response. The central banks of the United States, West Germany and Japan provided market liquidity to prevent debt defaults among financial institutions, and the impact on the real economy was relatively limited and short-lived. However, refusal to loosen monetary policy by the Reserve Bank of New Zealand had sharply negative and relatively long-term consequences for both financial markets and the real economy in New Zealand.[7]

The crash of 1987 also altered implied volatility patterns that arise in pricing financial options. Equity options traded in American markets did not show a volatility smile before the crash but began showing one afterward.[8]

  1. ^ Bates 1991; Seyhun 1990.
  2. ^ Roll 1988, pp. 20 (table 1), 21.
  3. ^ Sornette, Didier Sornette (2003). "Critical Market Crashes". Physics Reports. 378 (1): 1–98. arXiv:cond-mat/0301543. Bibcode:2003PhR...378....1S. doi:10.1016/S0370-1573(02)00634-8. S2CID 12847333.
  4. ^ Schaede 1991, p. 42.
  5. ^ Group of 33.
  6. ^ Lobb 2007.
  7. ^ Grant 1997, p. 330; Hunt 2009.
  8. ^ Hull 2003, p. 335.


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