… a better historical precedent for the recent market drop
In October 1987 Dow Jones dropped 22.6{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c}. The equivalent today would be a drop of 6,000 points on the Dow. Algorithmic trading, monetary policy tightening and a depreciating dollar were among the culprits of the 1987 crash. These are eerie similarities with last week’s Dow drop. In 1987 the effect on the economy was muted because the Fed loosened monetary policy, preventing possible liquidity problems. This is where the similarities end, argues Barry Eichengreen, because today’s Fed has much less room to decrease interest rates.
The Lessons of Black Monday
By: Barry Eichengreen – University of California, Berkeley
Why did we avoid a 6,000 point drop on the Dow?
Could it be that circuit breakers, market-wide trading halts and volatility interruption mechanisms, worked? After surveying 63 World Federation of Exchanges members, Clapham and al. found that the majority (86{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c}) of them have implemented circuit breakers to ensure investor protection and to increase market integrity and stability. In 2008 the proportion of exchanges using circuit breakers increased was 60{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c}.
Circuit Breakers – A Survey among International Trading Venues
Authors: Benjamin Clapham, Peter Gomber, Martin Haferkorn, Paul Jentsch, Sven Panz
From: Goethe University Frankfurt
Will the effect on the economy be muted again?
Roger Farmer argues that “there is a causal mechanism from market psychology to tangible economic outcomes” and that the ups and downs of the financial markets are followed by ups and downs in employment.
Confidence and Crashes
By: Roger Farmer – University of Warwick
A possible explanation
According to John Cochrane, the recent stock market drop is probably not a bubble popping, an effect from rising long-term real interest rates or an ad hoc increase of volatility. There are two possible explanations: markets are adjusting to strong economic growth and the subsequent inflation rise, or the markets are spooked at the prospect of high budget gaps which could lead to stagflation.
Stock Gyrations
By: John Cochrane – Stanford University
