What caused Black Monday, the stock market crash of 1987?

The cause of the stock market crash of 1987 was primarily program trading, used by institutions to protect themselves from significant market weakness. Some secondary factors included excessive valuations, illiquid markets and market psychology. Program trading exacerbated market weakness even though it was designed as a hedge. These computer programs automatically began to liquidate stocks as certain loss targets were hit, pushing prices lower. Then, the lower prices fueled more liquidation with stocks dropping 22% on the day. This is an example of behavior that is rational on an individual level – but irrational if everyone adopts the same behavior.

investopedia

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s