Studies of the 1987 stock market crash: Review and appraisal

Abstract

Within four months of the stock market crash on October 19, 1987, there were six studies of what happened. The Brady Commission, the Commodity Futures Trading Commission, the Securities and Exchange Commission, the General Accounting Office, the New York Stock Exchange, and the Chicago Mercantile Exchange all produced reports that described and analyzed the Crash, and in some cases made recommendations for additional regulation. This paper examines the conclusions and analyses contained in these reports and provides a summary of their recommendations. Particular attention is given to the allegation that stock index futures trading was a significant factor in the Crash. In addition, the recommendations that higher margins be imposed on futures transactions and that formal trading halts be instituted in both the futures and stock markets are discussed in depth. A major conclusion of this review is that new market-making procedures are needed to cope with the growing institutionalization of trading in equity and equity-derivative markets.

Kalman filter estimation for valuing nontrading securities, with applications to the MMI cash-future spread on October 19 and 20, 1987

“…Better estimates of the cash index can possibly provide a more realistic picture of the difference between stock and futures values. Our results complement previous studies that have attempted to estimate the value of stock index futures on the days around the crash; see Edwards (1989) for a review of the government reports on the crash, Harris (1989) for analysis of the S&P 500 contract, Blume et al (1989), who examine pricing anomalies on Monday and Tuesday, and Bassett, France and Pliska (1989) for analysis of the MMI cash-futures spread on Monday.…”

Index Futures and Predictability of the Underlying Stocks’ Returns: The Case of the Nikkei 225

“…However, both Bacha and Vila (1994), which employs the underlying stock index, and Chang et al (1999), which uses the underlying component stocks, find no change in price volatility in the underlying market around the SIMEX listing of the Nikkei 225 futures on September 3, 1986, while differing in the price volatility effect around the OSE listing. Similarly, Edwards (1988) and Kupiec (1998) dismiss the role played by derivative contracts in the 1987 market crash.…”