BLACK MONDAY

By: Rehan Ur Rahim Sohaib Ahmed Usama Akram Hassan Akhtar

Introduction
Black Monday refers to Monday 19 October

1987 Stock markets around the world crashed Shedding huge volumes in very short time The Dow Jones dropped by 508 points (22.61%) Twice as bad as 1929 decline that had started the Great Depression

Internal Causes
Mergers and takeovers 1982 Use of Junk bonds and IPOs for Capital

required Derivative securities which include index options in which stocks are not actually bought but the rights to buy and sell the stock are bought.

Internal Causes
Increase in use of Micro computers The market was controlled and prices were

set by computers instead of investors When the price of stock fell below the preset price the computer sold the stock which led to carelessly buying and selling of stock so the market crashed.

Internal Causes
Illiquidity in the market as there were only

sellers and no potential buyers so there was a shortage of cash. Another factor was the large trade deficit of US. The currency was weakened which forced the investors to pull out of the market. The high return on investment on long term bonds caused less people to take risk and make investments.

Internal Causes
There was also an overvaluation of stocks

before the crash in 1987 The price/earnings ratio and price/dividend ratio were too high

External Causes
Disputes between US and European countries

about interest rates and foreign exchange rates. Secondly there were also speculations about inflation in the economy.

US government reaction
The US central bank provided liquidity

through OMO. Helped commercial banks by giving discounts on heavy reserve needs. Interest rates on short and long term financial instruments were dropped provide liquidity Eased credit conditions to ensure that investors could continue operating.

Reforms
Circuit breakers were introduced. A mechanism by which trading would be

stopped for 1 hour if the DJIA dropped more than 250 points in one day. It would again be stopped by 2 hours again if the DJIA dropped another 150 points making it a total of 400 points in one day. The circuit breakers were installed primarily to prevent extreme changes in the stock market.

Reforms
A uniform margin requirement is another

change that was introduced after the crash. It aims to reduce volatility for stocks, futures and stock options. After the crash, some stock exchanges changed their computer systems in order to improve data management, effectiveness and increase accuracy.

Impact on the Economy

Expected Recession. However, there was no recession within the next 2 years Due to the intervention by the central bank of the U.S., the

Federal Reserve. Industries that were not directly tied to the stock markets were not influenced. Many U.S. corporations announced they would repurchase their own stocks, implying that they felt that the price drop was unnecessary. Moreover, continuous good news about the U.S. economy speeded the recovery from the market collapse.

Impact on the Economy

15,000 jobs were lost in the financial industry. Some serious business lenders saw it as

another great depression But by mid 1990s the economy began to grow again.

22 Most Effected Stocks of Dow Jones Index

American Express Co. (AXP.N) - down 30.9 percent Goodyear Tire (GT.N) - down 29.4 percent Eastman Kodak Co. (EK.N) - down 29.1 percent Honeywell (then Allied Signal) (HON.N) down 28.4 percent Procter & Gamble (PG.N) - down 28.2 percent 3M Co. (MMM.N) - down 27.9 percent International Paper (IP.N) - down 25.1 percent Navistar NAVZ.PK - down 25 percent Coca-Cola Co. (KO.N) - down 24.5 percent Alcoa Inc. (AA.N) - down 24.2 percent International Business Machines (IBM.N) down 23.2 percent

AT&T (T.N) - down 22.6 percent United Technologies (UTX.N) - down 20 percent Exxon ( proceeding Mobil merger) (XOM.N) - down 19.5 percent General Motors Corp. (GM.N) - down 18.9 percent Du Pont Co. (DD.N) - down 18.8 percent McDonald's Corp. (MCD.N) - down 18.3 percent Merck & Co. (MRK.N) - down 17.9 percent General Electric Co. (GE.N) - down 17.5 percent Chevron (preceding Texaco merger) - down 16.7 percent Altria (then Philip Morris) (MO.N) - down 14.7 percent Boeing Co. (BA.N) - down 11.75 percent

References

http://www.oppapers.com/essays/Black-Monday/121540 http://ezinearticles.com/?Black-Monday---Stock-Market-Crash-of-October19th,-1987&id=2204123 http://www.stockbreakthroughs.com/articles/1987-stock-market-crash.htm http://www.accessmylibrary.com/article-1G1-54115260/market-crash-1987changed.html

http://www.economist.com/node/9993586
http://online.wsj.com/article/SB119212671947456234.html http://www.newspaperarchive.com/DailyPerspectiveFullView.aspx?ViewDate =10/19/2007

http://www.greekshares.com/black_monday.php
http://www.reuters.com/article/2007/10/19/us-usa-markets-1987-dowidUSN1930010920071019 http://money.usnews.com/money/business-economy/articles/2007/10/19/thelessons-of-black-monday