Stock market crash and User talk:213.6.180.203: Difference between pages
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A '''stock market crash''' is a sudden dramatic decline of [[stock]] prices across a significant cross-section of a [[stock market]]. Crashes are driven by panic as much as by underlying economic factors. They often follow [[Speculation|speculative]] [[stock market bubble]]s. |
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== October 2008 == |
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Stock market crashes are in fact [[Social phenomenon|social phenomena]] where external economic events combine with [[crowd psychology| crowd behavior]] and psychology in a [[positive feedback]] loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions{{Fact|date=February 2008}}: a prolonged period of rising stock prices and excessive economic [[optimism]], a market where [[P/E|Price to Earnings]] ratios exceed long-term averages, and extensive use of [[margin]] debt and leverage by market participants. |
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[[Image:Information.png|25px]] Welcome to Wikipedia. The <span class="plainlinks">[http://en.wikipedia.org/wiki/International+Nonproprietary+Name?diff=244473710 recent edit]</span> you made to [[:International Nonproprietary Name]] has been reverted, as it appears to be unconstructive. Use the [[Wikipedia:Sandbox|sandbox]] for testing; if you believe the edit was constructive, ensure that you provide an informative [[Help:Edit summary|edit summary]]. You may also wish to read the [[Wikipedia:Introduction|introduction to editing]]. Thank you. <!-- Template:uw-huggle1 --> [[User:DavidWS|DavidWS]] ([[User talk:DavidWS|talk]]) 23:51, 10 October 2008 (UTC) |
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There is no numerically specific definition of a crash but the term commonly applies to steep double-digit percentage losses in a [[stock market index]] over a period of several days. Crashes are often distinguished from [[bear markets]] by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. The crash of 1987 for example did not lead to a bear market. Likewise, the Japanese [[Nikkei 225|Nikkei]] bear market of the 1990s occurred over several years without any notable crashes. |
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==Wall Street Crash of 1929== |
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{{main|Wall Street Crash of 1929}} |
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The most famous crash happened on [[October 29]], [[1929]]. The economy had been growing robustly for most of the so-called [[Roaring Twenties]]. It was a technological golden age as innovations such as radio, automobiles, aviation, telephone and the [[Electric power transmission|power grid]] were deployed and adopted. Companies who had pioneered these advances, like [[Radio Corporation of America]] (RCA) and [[General Motors]], saw their stocks soar. Financial corporations also did well as [[Wall Street]] bankers floated [[mutual fund]] companies (then known as [[investment trust]]s) like the [[Goldman Sachs]] Trading Corporation. Investors were infatuated with the returns available in the stock market especially with the use of [[Leverage (finance)|leverage]] through margin debt. On [[August 24]], [[1921]], the [[Dow Jones Industrial Average]] stood at a value of 63.9. By [[September 3]], [[1929]], it had risen more than sixfold, touching 381.2. It would not regain this level for another twenty five years. By the summer of 1929, it was clear that the economy was contracting and the stock market went through a series of unsettling price declines. These declines fed investor anxiety and events soon came to a head. [[October 24]] (known as [[Black Thursday]]) was the first in a number of increasingly shocking market drops. This was followed swiftly by [[Black Monday]] on [[October 28]] and [[Black Tuesday]] on [[October 29]]. |
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On Black Tuesday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the [[ticker tape]] system that normally gave investors the current prices of their shares. [[Telephone line]]s and telegraphs were clogged and were unable to cope. This information vacuum only led to more fear and panic. The technology of the New Era, much celebrated by investors previously, now served to deepen their suffering. |
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Black Tuesday was a day of chaos. Forced to liquidate their stocks because of [[margin call]]s, overextended investors flooded the exchange with sell orders. The glamour stocks of the age saw their values plummet. Across the two days, the Dow Jones Industrial Average fell 23%. |
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By the end of the week of [[November 11]], the index stood at 228, a cumulative drop of 40 percent from the September high. The markets rallied in succeeding months but it would be a false recovery that led unsuspecting investors into the worst [[Crisis (economic)|economic crisis]] of modern times. The Dow Jones Industrial Average would lose 89% of its value before finally bottoming out in July 1932. |
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==The Crash of 1987== |
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{{main|Black Monday (1987)}} |
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The mid-1980s were a time of strong economic optimism. From August 1982 to its peak in August 1987, the Dow Jones Industrial Average (DJIA) grew from 776 to 2722. The rise in market indices for the 19 largest markets in the world averaged 296 percent during this period. The average number of shares traded on the NYSE had risen from 65 million shares to 181 million shares.<ref>[http://archive.gao.gov/d30t5/134907.pdf ''Preliminary Observations on the October 1987 Crash''], [[Government Accountability Office|United States General Accounting Office]] (GAO). January 1988. GAO/GGD-88-38. p.14, p.36</ref> |
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The crash on [[October 19]], [[1987]], a date that is also known as [[Black Monday (1987)|Black Monday]], was the climactic culmination of a market decline that had begun five days before on October 14th. The DJIA fell 3.81 percent on October 14, followed by another 4.60 percent drop on Friday October 16th. On Black Monday, the Dow Jones Industrials Average plummeted 508 points, losing 22.6% of its value in one day. The [[S&P 500]] dropped 20.4%, falling from 282.7 to 225.06. The [[NASDAQ]] Composite lost only 11.3% not because of restraint on the part of sellers but because the NASDAQ [[market system]] failed. Deluged with sell orders, many stocks on the NYSE faced trading halts and delays. Of the 2,257 NYSE-listed stocks, there were 195 trading delays and halts during the day. <ref>U.S. GAO op. cit. p.55</ref> The NASDAQ market fared much worse. Because of its reliance on a "market making" system that allowed [[market maker]]s to withdraw from trading, liquidity in NASDAQ stocks dried up. Trading in many stocks encountered a pathological condition where the [[bid price]] for a stock exceeded the [[ask price]]. These "locked" conditions severely curtailed trading. On October 19th, trading in [[Microsoft]] shares on the NASDAQ lasted a total of 54 minutes. |
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The Crash was the greatest single-day loss that Wall Street had ever suffered in continuous trading up to that point. Between the start of trading on October 14th to the close on October 19, the DJIA lost 760 points, a decline of over 31 percent. |
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The 1987 Crash was a worldwide phenomenon. The [[FTSE 100 Index]] lost 10.8% on that Monday and a further 12.2% the following day. In the month of October, all major world markets declined substantially. The least affected was Austria (a fall of 11.4%) while the most affected was [[Hong Kong]] with a drop of 45.8%. Out of 23 major industrial countries, 19 had a decline greater than 20%.<ref>[http://arxiv.org/abs/cond-mat/0301543 ''Critical Market Crashes''], D. Sornette. p.6</ref> |
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Despite fears of a repeat of the 1930s Depression, the market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22. It took only two years for the Dow to recover completely; by September 1989, the market had regained all of the value it had lost in the 1987 crash. The Dow Jones Industrial Average gained six-tenths of a percent during the calendar year 1987. |
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No definitive conclusions have been reached on the reasons behind the 1987 Crash. Stocks had been in a multi-year bull run and market [[P/E ratio]]s in the U.S. were above the post-war average. The S&P 500 was trading at 23 times earnings, a postwar high and well above the average of 14.5 times earnings.<ref>U.S. GAO op. cit. p.37</ref> [[Herd behavior]] and psychological [[Feedback|feedback loops]] play a critical part in all stock market crashes but analysts have also tried to look for external triggering events. Aside from the general worries of stock market overvaluation, blame for the collapse has been apportioned to such factors as [[program trading]], [[dynamic asset allocation|portfolio insurance]] and [[derivative (finance)|derivatives]], and prior news of worsening [[economic indicator]]s (i.e. a large U.S. merchandise [[balance of trade|trade deficit]] and a falling [[United States dollar|U.S. dollar]] which seemed to imply future interest rate hikes).<ref>[http://hnn.us/articles/895.html - ''What caused the Stock Market Crash of 1987?'']</ref> |
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One of the consequences of the 1987 Crash was the introduction of the circuit breaker or [[trading curb]] on the NYSE. Based upon the idea that a cooling off period would help dissipate investor panic, these mandatory market shutdowns are triggered whenever a large pre-defined market decline occurs during the [[trading day]]. |
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==The Global Economical Crisis of 2008 or The SubPrime Crash of 2008 <ref>http://www.cato.org/pub_display.php?pub_id=8669</ref>== |
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{{main|Global financial crisis of September–October 2008}} |
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Beginning on September 16 with failures of large financial institutions in the United States, due primarily to exposure to securities of packaged SubPrime loans and credit default swaps issued to insure these institutions and loans, it rapidly evolved into a global crisis resulting in a number of bank failures in Europe and sharp reductions in the value of equities (stock) and commodities worldwide. This economical crisis caused countries to temporarly close their markets. It is an ongoing crisis that is currently happening today as of October 10, 2008. |
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The Times reported that "the meltdown was being dubbed the ''Crash of 2008'' and older traders were comparing it with Black Wednesday in 1987. The fall this week of 21 per cent was not as bad as the 28.3 per cent fall 21 years ago. But some traders were saying it was worse. “At least then it was a short, sharp, shock on one day. This has been relentless all week.”"<ref>[http://business.timesonline.co.uk/tol/business/markets/article4923227.ece] The Times</ref> |
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Forbes reported: |
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:"A 20 percent decline over a longer time is called a bear market. A bear market is a prolonged decline in prices for stocks, bonds, commodities, or all three. While there's debate about whether the decline of the seven trading days ending Thursday was a crash, there's no argument that we are in a bear market. The Dow Jones industrial average is nearly 42 percent lower than it was at its highest point last October; marking the largest decline since 1973-1974."<ref>[http://www.forbes.com/feeds/ap/2008/10/10/ap5538025.html] Forbes</ref> |
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==Mathematical theory of stock market crashes== |
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{{main|Modeling and analysis of financial markets}} |
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The mathematical characterisation of stock market movements has been a subject of intense interest. The conventional assumption that stock markets behave according to a random [[Gaussian distribution|Gaussian]] or [[normal distribution]] is incorrect. Large movements in prices (i.e. crashes) are much more common than would be predicted in a normal distribution. |
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Research at the [[Massachusetts Institute of Technology]] shows that there is evidence that the frequency of stock market crashes follow an inverse cubic [[power law]].<ref>[http://web.mit.edu/newsoffice/2003/powerlaw.html Stock trade patterns could predict financial earthquakes - MIT News Office<!-- Bot generated title -->]</ref> This and other studies suggest that stock market crashes are a sign of [[self-organized criticality]] in financial markets. In 1963, [[Benoît Mandelbrot]] proposed that instead of following a strict [[random walk]], stock price variations executed a [[Lévy flight]].<ref>Mandelbrot, B. (1963) ”The variation of certain speculative prices” Journal of |
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Business, XXXVI, 392-417</ref> A Lévy flight is a random walk which is occasionally disrupted by large movements. In 1995, Rosario Mantegna and Gene Stanley analyzed a million records of the S&P 500 market index, calculating the returns over a five year period.<ref>Mantegna, R.N., and Stanley, E. 1995. Scaling behaviour in the dynamics of an economic index. Nature 376(July 6):46.</ref> Their conclusion was that stock market returns are more volatile than a Gaussian distribution but less volatile than a Lévy flight. |
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Researchers continue to study this theory, particularly using [[computer simulation]] of crowd behaviour, and the applicability of models to reproduce crash-like phenomena. |
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==See also== |
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* '''[[List of stock market crashes]]''' |
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* [[Behavioral finance]] |
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* [[Business cycle]] |
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* [[Dot-com bubble]] |
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* [[Economic bubble]] |
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* [[Economic collapse]] |
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* [[Economic history]] |
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* [[Financial markets]] |
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* [[Financial crisis]] |
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* [[Flight-to-Liquidity]] |
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* [[Great Depression]] |
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* [[Market trends]] |
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* [[Meltdown Monday]] |
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* [[Modeling and analysis of financial markets]] |
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* [[Stock market]] |
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* [[Stock market boom]] |
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* [[Stock market bubble]] |
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* [[Subprime mortgage crisis]] |
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==Further reading== |
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* [[John Kenneth Galbraith|Galbraith, John K.]] ''The Great Crash''. Mariner Books, New York. ISBN 0-395-85999-9. |
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* [[Charles P. Kindleberger|Kindleberger, Charles P.]] 2000, ''Manias, Panics, and Crashes: A History of Financial Crises''. Wiley & Sons, New York, NY. ISBN 0-471-38945-5. |
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* [[Robert Shiller|Shiller, Robert J.]] 2001, ''[[Irrational Exuberance (book)|Irrational Exuberance]]''. Broadway, New York, NY. ISBN 0-7679-0718-3. |
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* [[Didier Sornette]], ''Why Stock Markets Crash''. Princeton University Press. ISBN 0691-09630-9 |
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==References== |
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{{reflist}} |
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==External links== |
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* [http://www.marketthoughts.com/every_generation_has_its_crash.html Every Generation has its Crash] |
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* [http://arxiv.org/abs/cond-mat/9907270 Log-periodic power law bubbles in Latin-American and Asian markets and correlated anti-bubbles in Western stock markets: An empirical study.]Anders, Sornette. ''International Journal of Theoretical and Applied Finance'' 4(6), 853-920(2001). |
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* [http://pages.stern.nyu.edu/~xgabaix/papers/theoryOfPowerLaw.pdf A theory of power-law distributions in financial market fluctuations.] Gabaix, Gopikrishnan, Pierou, Stanley. ''Nature'', vol 423. 15 May 2003. |
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{{Stock market crashes}} |
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[[Category:Stock market crashes| ]] |
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[[Category:Economic history]] |
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[[Category:Financial crises]] |
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[[Category:Market trends]] |
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[[Category:Economic problems]] |
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[[Category:Behavioral finance]] |
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[[af:Beursineenstorting]] |
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[[de:Börsenkrach]] |
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[[fr:Krach]] |
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[[nl:Beurskrach]] |
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[[ja:株価大暴落]] |
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[[no:Børskrakk]] |
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[[pl:Krach giełdowy]] |
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[[pt:Crash (economia)]] |
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[[ru:Биржевой крах]] |
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[[fi:Pörssiromahdus]] |
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[[sv:Börskrasch]] |
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[[ta:பங்கு சந்தை சரிவு]] |
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Revision as of 23:51, 10 October 2008
October 2008
Welcome to Wikipedia. The recent edit you made to International Nonproprietary Name has been reverted, as it appears to be unconstructive. Use the sandbox for testing; if you believe the edit was constructive, ensure that you provide an informative edit summary. You may also wish to read the introduction to editing. Thank you. DavidWS (talk) 23:51, 10 October 2008 (UTC)