A stock market crash is a sudden dramatic drop in stock prices across a significant cross section of the stock market, resulting in a significant loss of paper wealth. Distractions are driven by as much panic as the underlying economic factors. They often follow the speculative stock market bubble.
Stock market disturbance is a social phenomenon in which external economic events combine with the behavior and psychology of the crowd in a positive feedback loop where sales by some market participants drive more market participants to sell. In general, crashes usually occur under the following conditions: prolonged periods of stock price increases and excessive economic optimism, markets where the P/E ratio exceeds the long-term average, and the widespread use of margin and leverage debt by market participants. Other aspects such as war, large corporate hacks, changes in federal laws and regulations, and highly economically productive natural disasters can also affect significant drops in NYSE values ​​from a wide range of stocks. All such stock reductions may result in an increase in stock prices for companies that compete with affected corporations.
There is no specific definition of a stock market crash, but this term usually applies to losing steep two-digit percentages in stock market indices over several days. Crash is often distinguished from the bear market with panic sales and dramatic price reductions. Bear market is a period of decline in stock market prices measured in months or years. Strikes are often associated with bear markets, however, they do not always go hand in hand. The 1987 crash, for example, did not lead to the bear market. Likewise, Japan's bear market in the 1990s happened for several years without any significant accidents.
Video Stock market crash
History
Historically, the turmoil and fall of the early stock market were rooted in the financial activities of the Dutch Republic in the 17th century, the birthplace of the world's first official (official) stock exchange and market.
Maps Stock market crash
Math theory
The mathematical descriptions of stock market movements have been the subject of strong interest. The conventional assumption is that the stock market behaves in accordance with the random normal log distribution. Among other things, mathematician BenoÃÆ'®t Mandelbrot suggested as early as 1963 that statistics prove this assumption wrong. Mandelbrot observes that large price movements (ie crashes) are much more common than expected from log-normal distributions. Mandelbrot and others suggest that the nature of market movements is generally better explained using non-linear analysis and the concept of chaos theory. This has been expressed in non-mathematical terms by George Soros in a discussion of what he calls market reflexivity and his nonlinear movements. George Soros said in late October 1987, 'Mr. The inversion of Robert Prechter proved to be the gap that started the avalanche.
Research at the Massachusetts Institute of Technology shows that there is evidence of market share crash frequency following the law of reverse cubic forces. These and other studies such as Prof Didier Sornette's work show that stock market crashes are a self-organized self-critical sign on the financial markets. In 1963, Mandelbrot proposed that instead of following a rigorous random path, stock price variations made the flight of Là © vy. Flight Là © và © is a random walk that is occasionally distracted by large movements. In 1995, Rosario Mantegna and Gene Stanley analyzed a million records of the S & amp; P 500, counting the return for a five-year period. Researchers continue to study this theory, primarily by using computer simulations of the behavior of the crowd, and the application of models to reproduce a fall-like phenomenon.
Research at the New England Complex Systems Institute has found warning signs of damage using a new statistical analysis tool from the theory of complexity. This work shows that the panic that caused the crash comes from the increased mimicry in the market. The dramatic increase in market mimicry occurs for a full year before every market crash in the last 25 years, including the recent financial crisis. When investors follow the directions of each other, it is easier to panic to hold and influence the market. This work is a mathematical demonstration of a significant early warning sign of an impending market crash.
A recent phenomenon, known as the RR Reversal, has also been well documented in recent years - in which rising stocks are experiencing an unexplained and sudden setback of 10-40% within a month.
Big crash in the United States
Panic of 1907
In 1907 and 1908, the NYSE fell by almost 50% due to various factors, led by copper stock manipulation by the Knickerbocker company. United Copper's stock rose gradually until October, and after it fell, causing panic. A number of investment trusts and banks that invested their money in the stock market fell and began to close. Bank runs are further prevented due to intervention from J.P.Morgan. The panic continued until late 1908 and led to the formation of Federal reserves in 1913.
Wall Street Crash 1929
The economy has grown for most of the Roaring Twenties. It is a golden age of technology, such as innovations such as radios, automobiles, airlines, telephones, and power lines deployed and adopted. Companies that have pioneered these advancements, such as Radio Corporation of America (RCA) and General Motors, saw their shares soar. Financial firms also succeeded, as Wall Street bankers hovered mutual fund companies (later known as investment trusts) like Goldman Sachs Trading Corporation. Investors are crazy about the returns available on the stock market, especially with the use of leverage through margin debt.
On August 24, 1921, the Dow Jones Industrial Average hit a value of 63.9. On September 3, 1929, it had increased more than sixfold, touching 381.2. It will not regain this level for another 25 years. By the summer of 1929, it was clear that the economy was contracting, and the stock market was experiencing a series of disheartening price reductions. This decrease feeds investors' anxiety, and events come to a head on October 24, 28, and 29 (each known as Black Thursday, Black Monday, and Black Tuesday).
On Black Monday, the Dow Jones Industrial Average fell 38.33 points to 260, down 12.8%. Sales floods hit the ticker tape system that usually gives investors the current price of their shares. Telephone lines and telegraphs are clogged and unable to cope. This information vacuum only causes more fear and panic. New Era Technologies, once widely celebrated by investors, now serve to deepen their suffering.
The next day, Black Tuesday, was a day of chaos. Forced to liquidate their shares due to margin calls, long-fledged investors flooded the market with sell orders. The Dow fell 30.57 points to close at 230.07 on the day. Glamor stocks of those days saw their values ​​decline. For two days, the Dow Jones Industrial Average fell 23%.
On the weekend of 11 November, the index was at 228, a cumulative decline of 40% from the September high. The market rallied in a few months, but it was a temporary recovery that caused unsuspecting investors to experience further losses. The Dow Jones Industrial Average lost 89% of its value before it finally fell in July 1932. The crash was followed by the Great Depression, the worst economic crisis of the modern era, which hit stock and Wall Street markets throughout the 1930s.
October 19, 1987
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 increase 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 has risen from 65 million shares to 181 million shares.
The accident on October 19, 1987, the date also known as Black Monday, was the climactic peak of the market decline that began five days earlier on October 14. The DJIA fell 3.81 percent on Oct. 14, followed by another 4.60 percent. Fall on Friday, October 16th. On Black Monday, the Dow Jones Industrial Average dropped 508 points, losing 22.6% of its value in a single day. S & amp; P 500 down 20.4%, down from 282.7 to 225.06. The NASDAQ Composite lost just 11.3%, not because it held off on the part of the seller, but because the NASDAQ market system failed. Flooded with sell orders, many NYSE shares face trading stoppages and delays. Of the 2,257 shares listed on the NYSE, there were 195 trade delays and stops during the day. The NASDAQ market fared worse. Because of its dependence on a "market-making" system that allows market makers to withdraw from trading, NASDAQ's stock liquidity dries up. Trading in many stocks underwent a pathological condition in which the offer price for a stock exceeded the asking price. This "locked" condition severely restricts trade. On October 19, Microsoft's share trading on NASDAQ lasted a total of 54 minutes.
The Crash is the biggest one-day loss that Wall Street had suffered in continuous trade up to that point. Between the beginning of trading on October 14 until the close on October 19, the DJIA lost 760 points, a decline of more than 31 percent.
The 1987 crash was a worldwide phenomenon. The FTSE 100 index lost 10.8% on Monday and then 12.2% the following day. In October, all major world markets declined substantially. The most affected is Austria (fall of 11.4%) while the most affected is Hong Kong with a decrease of 45.8%. Of 23 major industrialized countries, 19 declined more than 20%.
Despite fears of a repetition of the 1930s Depression, the market soon rose after the crash, posting a one-day 102.27 profit record the following day and 186.64 points on Thursday 22 October. It only took two years for Dow to fully recover. ; in September 1989, the market had regained all the lost values ​​in the crash of 1987. The Dow Jones Industrial Average rose six tenths of a percent during the 1987 calendar year.
No definite conclusions have been reached about the reasons behind Crash 1987. Shares have been in multi-year bull runs and the US market P/E ratio is above the postwar average. S & amp; P 500 trades at 23 times profit, postwar high and well above average 14.5 times profit. Group behavior and a psychological feedback loop play an important part in all stock market crashes, but analysts are also trying to look for external trigger events. In addition to the general concerns of overvaluation of the stock market, the blame for the collapse has been divided into factors such as program trading, portfolio insurance and derivatives, and previous news from worsening economic indicators (ie large US merchandise trade deficits and US dollar declines, interest rates in the future).
One of the consequences of Crash 1987 was the introduction of circuit breakers or sidewalks on the NYSE. Based on the idea that the cooling period will help eliminate investor panic, this mandatory blackout is triggered whenever major market declines that have been determined occur during trading days.
Crash of 2008-2009
On September 16, 2008, the failure of large-scale financial institutions in the United States, mainly due to exposure to subprime loans and credit default swaps issued to ensure loans and their issuers, quickly turned into a global crisis. This resulted in a number of bank failures in Europe and a sharp decline in the value of stocks and commodities worldwide. The failure of the banks in Iceland resulted in the devaluation of Icelandic Kr Icelandna and threatened the government with bankruptcy. Iceland secured an emergency loan from the International Monetary Fund in November. In the United States, 15 banks failed in 2008, while others were saved through government intervention or acquisitions by other banks. On October 11, 2008, the head of the International Monetary Fund (IMF) warned that the world's financial system is being hobbled in "the brunt of systemic destruction".
The economic crisis caused countries to close their markets for a while.
On October 8, Indonesia's stock market halted trading, after a 10% drop in one day.
The Times London reported that the destruction was called Crash of 2008, and older merchants compared it to Black Monday in 1987. The week's decline was 21% compared to 28.3% fall 21 years before, but some traders say it's worse. "At least it was a short, sharp, surprise one day, it's endless all week." Business Week also refers to the crisis as a "stock market crash" or "Panic of 2008."
From October 6-10, the Dow Jones Industrial Average (DJIA) closed lower in all five sessions. The volume level broke the record. DJIA fell more than 1,874 points, or 18%, in the worst weekly decline ever on both points and percentage base. S & amp; P 500 fell more than 20%. This week also set 3 top ten NYSE Group Volume Records by October 8th at # 5, October 9th at # 10, and October 10th at # 1.
After being suspended for three consecutive trading days (October 9, 10, and 13), Iceland's stock market reopened on October 14, with the main index, OMX Iceland 15, closing at 678.4, which is about 77% lower than 3,004 , 6 at the closing on October 8th. This reflects that the value of the three major banks, which have formed 73.2% of the Iceland OMX value 15, has been set to zero.
On October 24, many of the world's stock exchanges experienced the worst decline in their history, with a 10% decline in most indices. In the US, DJIA fell 3.6%, ie not as much as other markets. In contrast, both the US dollar and Japanese yen jumped against other major currencies, particularly the British pound and the Canadian dollar, as world investors sought safe havens. Later that day, Bank of England vice-governor Charles Bean suggested that "This is a once-in-a-lifetime crisis, and perhaps the greatest financial crisis of its kind in human history."
On March 6, 2009, DJIA has dropped 54% to 6,469 (before recovering) from its peak of 14,164 on October 9, 2007, over a span of 17 months.
Mitigation strategy
One mitigation strategy is the introduction of trade restrictions, also known as "circuit breakers", which are the cessation of trading in the cash market and the cessation of related trade in derivatives markets triggered by the cessation of the cash market, all of which are affected based on substantial movements in market indicators broad. From the beginning, circuit breakers have been modified to prevent speculative gain and dramatic losses in the small term.
United States
There are three thresholds, representing different degrees of DJIA decline in terms of points. This threshold is set at the beginning of each quarter to assign a certain point value. For example, in the second quarter of 2011, Threshold 1 is a drop of 1,200 points, Threshold 2 is 2400 points, and Threshold 3 is 3600 points.
- If Threshold 2 is violated before 1 pm, the market closes for two hours. If such a decline occurs between 1pm and 2pm, there is an hour's pause. The market will close for the day if the stock sank to that level after 2 pm
- If Threshold 3 is violated, the market will close for the day, regardless of the time.
French
In France, France's main share index is called CAC 40. The daily price limits are applied in cash and derivative markets. The securities traded on the market are divided into three categories according to the amount and volume of daily transactions. The price limits for each security vary by category. For example, for a more liquid category, when the securities price movement from the previous day's closing price exceeds 10%, the quotation is suspended for 15 minutes, and the transaction is then resumed. If the price rises or falls more than 5%, the transaction will be suspended again for 15 minutes. A 5% threshold may apply once again before the transaction is terminated for the rest of the day. When such suspension occurs, transactions on options underlying underlying security are also suspended. Furthermore, when more than 35% of the capitalization of the CAC40 Index can not be quoted, the CAC40 Index calculation is suspended and the index is replaced by a trend indicator. When less than 25% of the capitalization of the CAC40 Index can be quoted, the quotation on the derivative market is suspended for half an hour or an hour, and an additional margin deposit is requested.
See also
- List of the stock market broke down
- VIX, Chicago Stock Options Volatility Index Stock Exchange
References
External links
- Le Bris, David. "What is the market fall?" Economic History Review
- Stock Market Crash of 1929.
- Crash of 2014: Like 1929, you will never hear it coming by Maketwatch.
- Can Government Control Stock Market Disruptions By HowStuffWorks.
- The Crash and Bear Interactive Chart 1929 by MacroTrends.
Source of the article : Wikipedia
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