What Caused the 1987 Stock Market Crash and Lessons for the 2008 Crash

Review of Accounting and Finance, 2009, Vol.8, No. 2, pp.123-137.

29 Pages Posted: 22 Jan 2009 Last revised: 20 Oct 2015

See all articles by Ryan McKeon

Ryan McKeon

University of San Diego

Jeffry M. Netter

Department of Finance; University of Georgia Law School

Date Written: January 19, 2009

Abstract

We review an explanation for the causes of the stock market crash in 1987, update the empirical support for that argument, and compare to recent market developments. While the market crash on October 19, 1987 was the largest one-day S&P 500 drop in percentage terms in history (20.47%) there was also a large market drop (10.12%) in the three trading days before the 1987 crash. Mitchell and Netter (1989) show that the three-day decline was the largest in more than 40 years, large enough that the drop was news itself (the October 16, 1987 drop immediately before the crash was also an extremely large one-day decline). The theoretical model of Jacklin, Kleidon, and Pfleiderer (1992) shows how a surprise significant drop in the market could have provided information to the market that could directly lead to an immediate crash. Here we follow the stock market for 20 years after 1987, and find the magnitude of the market decline immediately preceding October 19, 1987 was still a significant outlier - only one three-day period in the 20 years after 1987 had as large a market decline. We also document the large market movements and volatility in the period beginning in October 2008 and suggest that this "crash" is different than what occurred in 1987. The 1987 crash was due in part to characteristics news but also of the market and trading strategy, 2008 is more likely a response to fundamental economic news.

Keywords: crash, stock market, Black Monday, volatility

JEL Classification: G1, G01, G13, G34

Suggested Citation

McKeon, Ryan and Netter, Jeffry M., What Caused the 1987 Stock Market Crash and Lessons for the 2008 Crash (January 19, 2009). Review of Accounting and Finance, 2009, Vol.8, No. 2, pp.123-137., Available at SSRN: https://ssrn.com/abstract=1330220 or http://dx.doi.org/10.2139/ssrn.1330220

Ryan McKeon

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Jeffry M. Netter (Contact Author)

Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-4450 (Phone)

HOME PAGE: http://www.terry.uga.edu/directory/profile/jnetter/

University of Georgia Law School

225 Herty Drive
Athens, GA 30602
United States

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