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Carlson, Mark (2007) "a Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response"

Autor:   •  April 7, 2011  •  Essay  •  313 Words (2 Pages)  •  1,105 Views

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This critical review emphasized on some mixed findings about factors that caused the Stock Market Crash in 1987 and how this crash affected the Dow Jones (DJIA) and the S&P 500 index. On October 19, 1987 or also known as "Black Monday", the stock market (together with the associated futures and options markets) had crashed, with the S&P 500 stock market index falling about 20%. He reviewed that among the notable problems were because of the weaknesses of the trading systems (computer) that not capable to process so many transactions at once and the difficulty to gather the information in the rapidly changing environment that might result in pull back by investors in the market. According to Itskevich (2002), major indexes of market valuation in the United States dropped 30 percent or more in the days between October 14 and October 19, 1987. On October 19, the Dow Jones Industrial Average plummeted 508 points, losing 22.6% of its total value. The S&P 500 dropped 20.4%, falling from 282.7 to 225.06. However according to the website of University of Melbourne, she found that during the "Black Monday" other stock markets which did not use program trading also crashed, some with losses even more severe than the U.S. market and this outlook was supported by Schmidt (2003). Winkler and Herman (1987) noted that the interest rates were rising globally during the months leading up to the crash due to a growing U.S. trade deficit and decline in the value of the dollar that lead to inflation (where the need for higher interest rates in the U.S). In contrast, Itskevich (2002) viewed that if the large U.S. budget deficit was the cause then why did stock markets in other countries crash as well. Presumably if unexpected changes in the trade deficit were bad news for one country, it would be good news for its trading partner.

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