Stock Market Crash of 1987

Stock Market Crash of 1987
Name	Black Monday (1987)
Date	19 October 1987
Location	New York City, United States
Type	Stock market crash
Indices	Dow Jones Industrial Average, Standard & Poor's 500 Index, NASDAQ Composite
Magnitude	Dow fell 508 points (22.6%)
Casualties	None

Stock Market Crash of 1987 The 1987 crash, widely called "Black Monday", was a global equity market collapse centered on New York City that saw dramatic declines in the Dow Jones Industrial Average, Standard & Poor's 500 Index, and NASDAQ Composite on 19 October 1987. The event unfolded amid interactions among Federal Reserve, Securities and Exchange Commission, computerized trading systems, and international market linkages involving London Stock Exchange, Tokyo Stock Exchange, and Hong Kong Stock Exchange.

Background and causes

A confluence of factors preceded the crash, including monetary policy actions by the Federal Reserve and fiscal shifts associated with the Reagan administration and U.S. Treasury debt dynamics. Rising interest rates influenced valuations tied to the Treasury bond market and the Chicago Board of Trade futures markets, while international capital flows between United States, United Kingdom, Japan, Germany (1985–1990) and Canada amplified risks. Institutional strategies at Salomon Brothers, Goldman Sachs, Morgan Stanley, and Lehman Brothers intersected with innovations like portfolio insurance developed by firms including GAMCO Investors and firms using models inspired by work from Fischer Black and Myron Scholes. Geopolitical developments, including tensions related to Iran–Iraq War and policy moves after the Plaza Accord, combined with volatility signals in the Chicago Mercantile Exchange and the Chicago Board Options Exchange to create vulnerable market conditions.

Timeline of events (October 1987)

Early October saw heightened volatility after comments from officials at the Federal Reserve Bank of New York and speeches by Alan Greenspan (then Chairman of the Federal Reserve Board) allies, provoking large movements in U.S. Treasury yields and the London Stock Exchange. On 14 October, losses in Tokyo Stock Exchange and Hong Kong Stock Exchange presaged declines in Wall Street, and on 16–19 October, selling intensified. On 19 October, after openings in New York Stock Exchange and heavy activity at American Stock Exchange, the Dow Jones Industrial Average plunged 22.6%, surpassing prior panics like the Panic of 1907 in intraday velocity. Cross-market linkages with Toronto Stock Exchange and Australian Securities Exchange produced synchronous falls, while closing auctions at Nasdaq Stock Market reflected order imbalances. Major banks and brokerages such as J.P. Morgan & Co., Bank of America, and Citicorp mobilized liquidity responses.

Market mechanisms and contributing factors

Program trading strategies, especially portfolio insurance strategies promoted by financial engineers influenced by Hayne Leland and Mark Rubinstein, executed dynamic hedges via futures on the Chicago Board of Trade and options on the Chicago Board Options Exchange, accelerating feedback loops across Standard & Poor's 500 Index futures. Institutional constraints at custodians including The Depository Trust Company and clearing arrangements with National Association of Securities Dealers created liquidity strains. Market structure elements—such as the lack of coordinated circuit breakers across NYSE, London Stock Exchange, and Tokyo Stock Exchange—and the concentration of trading at specialist firms like Lehman Brothers and Salomon Brothers exacerbated price discovery failures. International arbitrage performed by firms tied to Mitsubishi UFJ Financial Group and Deutsche Bank transmitted shocks across currencies and equity markets linked through the Federal Reserve System and Bank for International Settlements frameworks.

Immediate economic and financial impact

The crash erased trillions of dollars of market capitalization from blue-chip firms listed on New York Stock Exchange and technology listings on NASDAQ Composite, affecting corporations such as General Electric, IBM, ExxonMobil, and AT&T. Margin calls prompted deleveraging at investment banks including Goldman Sachs and Morgan Stanley, while mutual funds overseen by firms like Vanguard and Fidelity Investments faced redemptions. Short-term funding markets, including repurchase agreement networks serviced by Bank of New York and J.P. Morgan Chase, experienced stress, and insurance entities with exposure from derivatives tied to Chicago Mercantile Exchange products saw contingent liabilities. Despite severe equity losses, macroeconomic indicators in United States such as GDP and unemployment did not immediately replicate 1929 patterns, in part due to interventions by central banks including the Federal Reserve, Bank of England, and Bank of Japan.

Policy and regulatory responses

In the aftermath, regulators including the Securities and Exchange Commission and policymakers at the Federal Reserve Board and Treasury Department convened crisis consultations with major financial institutions like Goldman Sachs, Morgan Stanley, and Salomon Brothers. The SEC implemented reforms at the New York Stock Exchange and NASDAQ focused on trading halts, order handling, and transparency, while the Committee on Federal Reserve Bank Operations and the Group of Ten engaged on international coordination. The introduction and refinement of circuit breakers, trading curbs, and changes to margin rules involved collaboration among Boston Stock Exchange, Chicago Board Options Exchange, and National Association of Securities Dealers overseers. Congressional hearings led by members of United States House Committee on Financial Services influenced legislation and oversight practices.

Long-term consequences and legacy

Long-term effects included enhanced market safeguards across NYSE, NASDAQ, London Stock Exchange, and derivatives venues such as Chicago Mercantile Exchange, and accelerated adoption of risk management practices at institutions like Goldman Sachs and J.P. Morgan & Co.. Developments in financial engineering, regulatory frameworks such as those influenced by the Basel Committee on Banking Supervision, and evolution of central bank crisis tools trace roots to the 1987 collapse. The event shaped debates involving figures like Alan Greenspan, Paul Volcker, and academics such as Robert Shiller and Economist Paul Krugman on market efficiency and behavioral finance, influencing later episodes including the Dot-com bubble and the Global financial crisis of 2007–2008. The crash remains a seminal case in studies at institutions like Harvard Business School, University of Chicago Booth School of Business, and London School of Economics.

Category:1987 financial crises