BLACK MONDAY

Black Monday is the name ascribed to Monday October 19, 1987. On that day, the Dow Jones Industrial average fell 22.6%, the largest one-day decline in recorded market history. This one day decline was not confined to the United States, but mirrored all over the world. By the end of October, Australia had fallen 41.8%, Canada 22.5%, Hong Kong 45.8%, and United Kingdom 26.4%.

(The term Black Monday is also applied to October 28, 1929, the follow-up to Black Thursday, which started the stock market crash of that year.)

There is a certain degree of mystery associated with the 1987 crash. Many have noted that no major news or events occurred prior to the Monday of the crash, the decline seeming to have come from nowhere. Important assumptions concerning human rationality, the efficient market hypothesis, and economic equilibrium were brought into question by the event. Debate as to the cause the crash still continues many years after the event, no firm conclusions having been reached.

Potential causes for the decline include program trading, overvaluation, illiquidity, and market psychology. These theories must explain why the crash occurred on October 19, and not some other day, why it fell so far and fast, and why it was international in nature and not unique to American markets.

The most popular explanation for the 1987 crash was selling by program traders. Program trading is the use of computers to engage in arbitrage and portfolio insurance strategies. Through the 1970s and early 1980s, computers were becoming more important on Wall Street. They allowed instantaneous execution of orders to buy or sell large batches of stocks and futures. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline. Some economists theorized the speculative boom leading up to October was caused by program trading, while the crash was a return to normality. Either way, program trading ended up taking the majority of the blame for the 1987 stock market crash.

Economist Richard Roll believes that the international nature of the stock market decline contradicts the argument that program trading was to blame. Program trading strategies were used primarily in the United States, Roll writes. If program trading caused the decline, why would markets where program trading was not prevalent such as Australia and Hong Kong have declined as well? Though these markets may have been reacting to excessive program trading in the United States, observation tells us otherwise. The crash began on October 19 in Hong Kong, spread west to Europe, and hit the United States only after Hong Kong and other markets had already declined by a significant margin. The crash seems to have been a reaction to something other than program trading.

The movie Wall Street premiered less than two months after the crash.