Alpha Exchange
35 Years Later…Retrospective on the 1987 Stock Market Crash
Oct 19, 2022
Analyzing the 1987 stock market crash, the podcast explores the role of mechanical trading strategies, portfolio insurance, and liquidity dynamics. Guests share their firsthand experiences and insights, while reflecting on the lasting impact of the crash on market behavior and the challenges of predicting future crashes.
21:17
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Quick takeaways
- The 1987 stock market crash demonstrated the potential for rapid and significant drops in the market due to the introduction of stock index futures and the impact of mechanical trading strategies like portfolio insurance.
- The crash of 1987 highlighted the challenges posed by liquidity demands, the complex relationship between stock and bond prices, and the importance of understanding the behavior of options and risk premiums.
Deep dives
The 1987 Stock Market Crash: A Day of Seismic Decline
In 1987, the stock market crash led to a decline of 22.6% in the Dow Jones Industrial Average and 20.4% in the S&P 500. The crash was driven not only by fear but also by mechanical trading strategies, such as portfolio insurance, that amplified selling pressure. This crash demonstrated the potential for rapid and significant drops in the market due to the introduction of stock index futures and the enhanced correlation it brought. Portfolio insurance, in particular, exacerbated the move and failed to protect investors as expected. The crash highlighted the importance of understanding risks and the potential impact of policy responses by entities like the Federal Reserve.
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