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A STUDY ON BLACK MONDAY FINANCIAL CRISIS, 1987 INTRODUCTION The

biggest stock market crash in the United States that took place on October 19,
1987 is commonly referred to as Black Monday, the day of the largest percentage
fall in the history of Wall Street. One among the worst financial incidents after the
Wall Street crash of 1929 was the stock market crash of 1987. Optimistic in
strengthening the U.S.

economy, stock prices started to rise in the summer of 1982. Five years later, the
Dow Jones Industrial Average, a financial sector measure had risen by 230
percent.. The rising market was called a "bull market" because investors were
anticipating a rise in earnings, so they were "driving" forward to buy more stock.
In August 1987, the stock market began to collapse gradually. The Dow Jones
Industrial average fell unexpectedly by 95 points after the U.S.

government reported a $1.5 billion larger trade deficit than expected on October
14. The index fell by 57 points the next day, and on Friday another 108 points
lost. On Monday, the market collapsed by an astounding 508 points. This stock
market fall was the largest one-day percentage drop in stock market history. The
Dow Jones Industrial Average (DJIA) lost nearly 22.6

percent in a single day on October 19, 1987, exposing investors to a new era of
uncertainty on the stock market. The incident marked the start of a worldwide
downturn in the stock market, and Black Monday was one of the worst days in
financial history. By the end of the month, more than 20 percent of the major
stock exchanges had fallen.

That was the major single trading session fall in the history of the Unites States,
even greater than the Black Monday in 1929, that led to a market drop of 13
percent. WHAT CAUSED 1987 CRASH? The stock exchange crash of 1987 caused
momentous damage, with the Dow Jones losing about 22% of its worth. There
are several causes of the accident itself, with several major factors leading to the
devastation of Black Monday.

Declining dollar value The federal government published reports of a growing

trade deficit in the weeks before the 1987 crash, which shocked American Stock
exchange and undermined the United States currency. However, a weaker dollar
triggered a run away from dollar-denominated investments, which resulted in
increased rate of interest in the process.

The information about the currency alone was not huge, but it was enough to
create confusions as sellers hit the market trying to unload their shares on Friday ,
16th October (the Dow Jones was down 4.6 percent on this day–a forerunner to
the bigger fall in Black Monday). Extensive media coverage No one specifically
accused the media of Black Monday's stock market crash.

Nevertheless, the 1987 crash was the very first time the television audiences
throughout the world saw a real-time market crash as they watched the chaos
unfolding on CNN and local news, which was a great deal in 1987. On global
trading floors, the visual images of suffering traders proved to be overwhelming
and the outcome was foreseeable.

The more the regular investors looked at the Black Monday headlines, the more
they desired to sell their portfolio positions. Program trading Another objective
of criticism was computerized trade, more formally known as "program trading"
by Wall Street insiders. Program trading, primarily followed by large organized
investment firms, allowed the execution of large-scale stock trading orders under
specific market conditions (including unforeseeable circumstances, as was the
case with Black Monday, 1987).

With large-scale stock trading, most of which sold orders and emerged on the
market during the global crisis, Black Monday only became riskier. Portfolio
insurance Some also noted that equity insurance triggered Black Monday's stock
market crash in 1987. The selling of risky securities and options leading to further
market losses was another type of asset vehicle.

Traders used equity insurance to protect future stock indexes and cover stock
portfolios against significant drops in the market. Hazardous bond trading
became such a threat to market stability. The chart below illustrates stock
performance before, during and after the 1987 Black Monday. The blue column
displays the annual stock yield rate for the five years leading before the crash.

The dark green column refers to Black Monday's percentage change in stocks.
The light green column refers to the percentage change in stocks over the five
years following the crash. / EFFECTS OF BLACK MONDAY The effect of Black
Monday spread to various parts of the world.

Effects in Unites States The 1987 stock market crash was quite different from the
1929 crash. The latter fall of the market has done far more permanent economic
damage and to the stock markets as well, which required 25 years to recover
from the 1929 crash. In comparison, the 1987 Black Monday crisis did not have a
lasting negative impact, with the Index rising 288 points in three trading days and
reversing all losses on the stock market in September 1989. However, after the
October crash, the American economy did not experience any lasting harm, not
even a slight recession.

Effects in United Kingdom On 16 October 1987, all of London's markets were

suddenly shut due to the Great Storm of 1987. When London reopened, the
speed of the crash increased, some attributed to the end of the storm. The
FTSE100 dropped by 9:30 a.m. by more than 136 points. The sudden decline in
the index of the Financial Times Stock Exchange took it down 23 percent in two
days, roughly the same amount the NYSE dropped on the crash day. Stocks kept
falling, but at a less precipitous rate, until mid-November they reached a trough
36 percent below their pre-crash high.

The condition was so worse that before 1989 stocks would not begin to recover.
Effects in Japan In Japan, because of the time zone difference, the October 1987
accident is referred to as "Blue Tuesday." The aftermath of the initial crash in
Japan was relatively mild.

The initial market split was drastic in both cases, according to economist Ulrike
Schaede, the Tokyo market dropped by 14.9 percent in one day, while Japan's
US$ 421 billion fall was equivalent to Zero. Systemic variations between the US
and Japanese financial systems, however, resulted in significantly different
outcomes during and after the crash on Tuesday, October 20. There was no more
than mild panic in Japan. After only five months, the Nikkei 225 Index returned to
its pre-crash rate.

In the aftermath of the crash, other global markets were less successful, with New
York, London and Frankfurt all taking more than a year to hit the same recovery
rate Effects in New Zealand New Zealand's stock market crash was especially long
and deep, extending its decline after other global markets had recovered for a
long time. The repercussions of the October 1987 crash, unlike other countries,
flooded into their real economy and led to a prolonged recession.

Nearly 15% of the stock market in New Zealand crashed on the first day of the
crash. The value of New Zealand's market shares plummeted by half in the first
three and a half months after the crash. The index had lost 60 percent of its value
by the time it reached its height in February 1988.

A surge of credit expansion of significant macroeconomic advice triggered the

financial crisis. Investment firms and property developers started selling their
assets with gas, partly to help offset their share price losses, and partly because
the crash exposed overbuilding. However, for their increased borrowing, these
companies had used property as leverage.

The New Zealand Reserve Bank declined to relax monetary policy due to the
crisis, which would have helped businesses As the damaging effects spread over
the next several years, large businesses and financial institutions have gone
bankrupt and the banking systems of New Zealand and Australia have been
weakened and access to credit has fallen. Such combinations led to a long
recession between 1987 and 1993. The accompanying chart shows the volatility
of the U.S.

stock market since 1970. This shows how Black Monday has been reported as a
long-term blip over the past 47 years and how resilient markets have been. /
MEASURES TAKEN FOR RECOVERY Measures taken in U.S After the October
crash, there has not even been a slight recession in the US economy. This is
mainly due to the Federal Reserve's rapid intervention, which reduced interests
rates and sustained the financial markets.

The Federal Reserve has announced that it has opened its doors to financial
institutions at risk of imploding by providing them loans at and capital. On 20
October 1987, it voiced its willingness to behave as a source of cash flow in order
to boost the financial and economic status. The Federal Reserve’s support also
encouraged banks to give loans without worrying about bankruptcy, which gave
a much-needed boost to the markets and the economy of United States, and,
more significantly, strengthened the notion that the American economy worked
in a “business as usual” climate.

Short-term repairs like circuit breakers, shutdown measures have resulted in

quicker, more permanent fixes. Digital trading was reinforced while derivative-
heavy portfolio insurance plans were kept in check. "Flash crashes" such as the
one-day crash of Dow Jones Index on Black Monday, which encouraged traders
to disperse portfolio risk and highlighted the importance of building a trading
strategy capable of resisting the difficult conditions of traders in October 1987.

Measures taken in Japan The distinctive institutional characteristics of Japan that

were already in place at the time helped to dampen confusion, according to
economist David D. Hale. These included Trading curbs such as strong limits on
price movements of more than 10–15% Limits and structural barriers to quick-
selling by international and domestic traders Constant adjustments to margin
requirements in due to changes in volatility Strict guidelines on mutual fund
redemptions and The Ministry of Finance tracked total shares and practice moral
suasion on the securities sector.

Introduction of circuit breakers The development and execution of "circuit

breakers" was a primary consequence of the Black Monday crash. Global stock
exchanges implemented "circuit breakers" after the 1987 crash that temporarily
suspended trading when major stock indexes dropped by a specified percentage.
In India, as of 2019, if the S&P 500 Index falls by more than 7% from the previous
session's closing price, the first circuit breaker must fly, halting all 15-minute
stock trading.

The second circuit breaker is activated if there is a 13 percent drop from the
previous close in the index, and if the third circuit breaker level is triggered by a
20 percent drop, then trading is stopped for the rest of the day The aim of the
circuit breaker program is to try to avoid a market panic in which investors start
recklessly selling all their properties. Much of the severity of the Black Monday
crash is widely believed to have been triggered by widespread panic.

Temporary trading breaks under the circuit breaker program are intended to
provide investors some room to catch their breath and hopefully take time to
make sound trading decisions, while preventing blind stock selling panic.
CONCLUSION After the 1987 crash, the stock market recovered faster than it did
after the1929 crash, when it took the Dow Jones two decades to recover
completely.

The markets took nearly two years after 1987 to reach the rates seen during the
last trading session on Oct. 16, 1987, just before the Black Monday. The period
amid stock market crashes has declined over the past few decades. It usually took
a century for another crash to take place, but this time period in the early 20th
century has been shortened to decades and is now down to just years for another
stock market crisis to take place.

Many stock markets crashes have been triggered by people who are boosting
stock prices beyond the selling value of the stock. If stock prices are rising
exponentially, it is usually a indicator of an economic bubble. Investors fail to
bear in mind that they also run the risk of incurring massive losses if they put
their money into trading expecting a high return potential.

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