At the beginning of 2008, the stock markets are quite turbulent, which brings us back to crash considerations. We don’t think the current stock market situation compares to an academic crash, not at all… But in times of turmoil, it’s always a good point to get back to basics… We intend to present some simple and fundamental thoughts about Crashes and spikes that may shed some light on the current state of the market.
In this document, we intend to provide a simple exposition of those common but always intriguing market moves that are crashes. In fact, characterizing large stock market moves, particularly large negative falls, is fundamental to risk management. One must always bear in mind the high risk before high returns. The complex evolution of stock market prices is a true reflection of the Börsencrash 2022 continuous stream of news being interpreted and processed by analysts and traders. Accordingly, big market losses can result from really nasty surprises. It is a fact that shocks are triggered by external news or events such as September 11, 2001, which can move stock prices and create large bursts of volatility.
A key issue
However, this is only part of the story. A key point is to examine whether large losses (or falls) may be more likely to have an internal origin, inherent in the dynamics of the stock market itself. Then the external news would only act as a trigger, but not as a decisive factor for crashes. This means that some other news or events would have had the same impact on the market.
Internal cause of crashes required
This internal origin of breakdowns requires examining signs of instability found in market dynamics. Then we need to carefully examine the accident history and see if we can identify some common features.
First of all, we want to use examples to show that crashes are a part of financial market life… One should not overemphasize their importance. Then we propose to examine some common features of crashes that provide some clues for investment decisions when these specific features occur.
An important motivation for studying
A key motivation for studying stock market crashes is that for most people, especially economists, they are always unforeseen. Our aim is that if we are well prepared, we can at least secure and protect our capital. Remember these two famous analyses :
(1) “In a few months, I expect the stock market to be a lot higher than it is today.” These words were uttered by Irving Fisher, America’s respected and celebrated economist, Professor of Economics at Yale University, 14 days before the collapse of Wall Street on Black Tuesday, October 29, 1929.
(2) “A major depression like 1920-21 is beyond the realm of probability. We are not facing a protracted liquidation.” This was the Harvard Economic Society’s analysis to its subscribers shortly after the 1929 crash. In 1932 the company closed its doors.
Document in the academic debate
Note that in this document we do not enter into the academic debate about the correct definition of accidents. We consider large losses over a short period of time as crashes, for example a loss of more than 10-15% over a month. In addition, we often see a large increase in volatility during this period, with some daily returns of -6% and others of +4%. The general mood of analysts and investors is also an interesting point to watch to characterize crashes : during these periods, pessimism is high enough to prompt some panic and then collective “crowd” behavior from many interacting actors to generate for the market. Of course, in case of a daily return of -20%, followed by further losses in the next few days, we enter the purely academic definition of crashes and no one will dispute them!
1- A brief history of crashes (key examples)
Between 1585 and 1650, Amsterdam became the most important trading center due to the growing commercial activity in the newly discovered America. The years of tulip speculation came at a time of great prosperity in the Dutch Republic. The tulip has been imported to Western Europe from Turkey since 1554. What we now call the “tulip craze” of the seventeenth century was the “safe investment” period from the mid-15th century to 1636, before its disastrous end in 1637. People became too confident that this “safe thing” was theirs would always bring in money, and at its peak participants mortgaged their homes and businesses to trade in tulips. Before the crash, any suggestion that the price of tulips was irrational was dismissed by all participants. The crisis came unexpectedly. On February 4, 1637, the possibility that the tulips could finally become unsaleable was mentioned for the first time. Lightbulbs that were worth tens of thousands of dollars (in present value) in early 1637 became worthless a few months later. This is a remarkable event in history, where all the characteristics of modern accidents can be identified, as we will see in the next few examples.
Now let’s describe the most famous crash, that of October 1929. After that Godzilla, the US banking industry underwent the greatest structural changes in its history as Roosevelt’s New Deal ushered in a new era of government regulation. The October 1929 crash shows the notable characteristics associated with crashes. First, it was unforeseen. The most renowned economic forecasting institutes in America did not predict a crash and a depression at the time. A second general feature illustrated by the October 1929 event is that the financial collapse happened when the macroeconomic news was looking good . The political mood before the crash in October 1929 was also optimistic. In November 1928, Herbert Hoover was elected President of the United States by a landslide, and his election sparked the largest surge in stock purchases to date. Wall Street collapsed less than a year after the election.
Another example
From the October 14, 1987 opening to the Börsencrash 2022 October 19 market close, major market valuation indices in the United States declined by 30% or more. In addition, all major world markets fell significantly during the month. The US wasn’t the first to fall sharply. The non-Japanese Asian markets began a severe decline on October 19, 1987, their time, and this decline was repeated first in a number of European markets, then in North America, and finally in Japan. In local currency units, the minimal decrease was in Austria (
