FIM - GROUP 3
BLACK MONDAY
1987
Black Monday
“Black Monday” refers to the catastrophic stock market
crash that occurred on Monday, October 19, 1987.
Stock markets around the world crashed
Biggest one-day percentage drop in U.S. stock
market history.
On October 14, the Dow
experienced a major
decline of nearly 4%,
dropped another 2.5% the
following day.
October 16, the Friday
before Black Monday, saw a
devastating 5% loss in
London stock markets that,
ominously, the day of
Great Storm of 1987.
Black Monday
On Monday morning, the
crash started in Hong Kong.
The crash continued
throughout all of Asia and all
during the Asian trading
session, as other markets
began to feel the “aftershocks”
of the initial crash.
The market carnage
continued, spreading
throughout Europe when the
London market session
opened.
By the time the U.S. stock
markets opened, stocks were
virtually in freefall. By the end
of the day, the DJIA had
dropped by more than 500
points and the S&P 500 by
more than 55 points.
WHY DID IT
HAPPENED?
A strong bull market
overdue for a correction
From 1982 to 1987, the market experienced
significant expansion without a major corrective
retracement.
Stock prices had surged, with a remarkable 44%
increase in 1987 alone, reflecting potential
overextension.
Prices had reached unsustainable levels relative
to earnings and other fundamental indicators.
Program Trading
Speed and Efficiency: execute trades more
quickly than ever before, leading to rapid
changes in market dynamics
Automatic trading: relied on algorithms to
automatically execute buy or sell orders based on
predetermined criteria
Feedback Loops: as prices rose, the models
generated more buy orders, further driving up
prices and vice versa
Domino effect
Portfolio
Insurance
And its role on the stock market
prior to the 1987 crash
Hayne Leland Mark Rubenstein John O’brien
Founded Leland O'Brien Rubinstein Associates (LOR) in 1980 to
provide portfolio protection strategies
The method
Compute optimal stock-to-cash ratios
Buying portfolio insurance was similar to buying
a put option in that it allowed investors to
preserve upside gains but limit downside risk.
In practice, the futures market were preferred
instead of the cash market
Provide protection against losses from falling
equity prices without trading stocks.
Cheaper to participate
Many portfolio insurers were not authorized to
trade their clients' stock
Portfolio insurers ran the models periodically
and then traded in batches because the
procedure was time-consuming and transaction
costs could add up with constant re-optimizing
Economic impacts
Stock Market Decline
Global economic uncertainty
Impact on investor confidence
Stock Market
Decline
All major worldwide markets declined
substantially in October: 19 declined
more than 20%
HongKong had the largest drop
with 45.8%
US drop by 22.6%
Finally Japan with a decline of
22.8%
The worldwide loss was $1.7 trillion
Global economic
uncertainty
Many investors suffered significant
losses
It led to a period of economic
uncertainty and instability, and it
took several years for the global
economy to fully recover.
Impact on investor
confidence
Investors may become unsure about
the reasons behind the crash and the
potential risks ahead.
Making investors more risk-averse
and hesitant to engage in future
investment activities.
The Fed’s
Response
Liquidity assurance: Fed's commitment to
provide liquidity for the economic and
financial system.
Encouragement of Lending: The Fed urged
banks to continue lending despite potential
losses, viewing it as vital for preserving the
financial system.
Investor Confidence Restoration: Experts
suggest the Fed's actions boosted investor
confidence in its ability to manage market
crises effectively.
How did the market recover?
What do we learn
from this crisis?
Prepare for improbable events: diversify assets
and hold low-risk investments
Adopt a long-term perspective: focus on long-
term goals and ignore short-term fluctuations.
Avoid relying heavily on predictions:
Embrace market uncertainty
Stress-test portfolios against extreme scenarios
(will your portfolio still meet your cash flow
needs)
Maintain an adequate margin of safety to ride
out extreme downside events.
Avoid excessive debt
What can we do to
prepare for inevitable
market crashes?
For the investors
Create a proper investment
plan or trading strategy.
Remain calm, and rational, to
avoid emotional decision-
making
Setting a stop-loss
For the market controller
Regulations to minimize the
effects of stock market flash
crashes.
Daily Trading Limit
Circuit breaker
Daily Trading Limit
A defined limit on the price movement of a security that
represents the percentage of a stock's price that can increase or
decrease during a single trading day.
Daily Trading Limit is determined by adding or subtracting a
certain percentage (±%) of the reference price of the security.
Example: HOSE: ± 7%
=> Market Stability, Investor protection, Risk control, .....
Circuit breaker
If the S&P 500 Index falls by more than If there is a 13% drop in the If there is a 20% drop
7% from the previous day’s closing price index from the previous close => The third circuit breaker level
=> The first circuit breaker for 15 => The second circuit breaker => Trading is halted for the
minutes remainder of the day.
=> Avoid a market panic.
Thank you
very much!
