Stock Market Crashes

Stock market crashes, defined as precipitious declines in value for securities that represent a large proportion of wealth (Garber 1992), are rare, difficult to explain, and potentially catastrophic. During four trading days in the crash of October 1987, the U.S. stock market fell by about thirty percent, wiping out roughly one trillion dollars of equity. On October 19, alone, Black Mondat, the market fell by over twenty percent. Roll (1989) documents simultaneous declines in markets around the world, irrespective of the level of technical sophistication, with concurrent panics that evoked memories of 1929 and the Great Depression._x000B__x000B_What causes such events? Do they signal important failures in the financial system? Are they the forerunners of macroeconomic difficulties such as the Great Depression? What are appropriate responses? Adding to the importance of these questions is the potential for interaction. For example, although there may be incentives for a quick response such as the Presidential Task Force or Brady Report (1988), the adequacy of the response is clearly tied to how well the causes are understood.