Cause of the crash in stock market

Essay by linchitingUniversity, Bachelor'sA-, May 2005

download word file, 9 pages 4.7

1. Introduction

1.1 Black Monday

The 1987 stock market crash stands out as one of the most remarkable financial events of the 20th century, perhaps since the emergence of our capitalist system several centuries ago. What makes it remarkable is:

1) The historic extent to which markets fell, an unprecedented 23%, and that they did so all over the world.

2) Its suddenness, how it appeared out of nowhere, and only took one day to play itself out.

3) Its complete lack of explanation. To this day no definite reason for the decline has been isolated. Basic concepts such as cause and effect, predictability, and human rationality melt before the evidence of the record breaking decline

1.2 2001-2002 decline

This downturn can be viewed as part of a larger bear market or correction, after a decade-long bull market had led to unusually high stock valuations. The NASDAQ was trading at 4234.33

on September 1, 2000. From September of 2000 the NASDAQ dropped 45.9% to 2291.86 by Jan 02, 2001. In Oct. of 2002, the NASDAQ dropped as low as 1,108.49 which is 78.4% drop from its all-time high of 5,132.52 in Mar. of 2000. A total of 8 trillion dollars of wealth was lost in the market decline.

2. Causes of the Crash in 1987

So, what were the causes of the stock market crash of 1987? Many stock market analysts believe that the crash was set off by a number of events. Here I am providing five reasons that could be factors for the crash in 1987, including psychological cause, the poor choices of portfolio insurance professionals, program trading, derivative securities, and trade and budget deficits

2.1 Psychological cause

1) Why the 1987 crash occurred on Monday, October 19?

In the historical model investors had adopted, the crash had...

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