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December, No. 04

On Monday, October 19, 1987 more than 500 billion dollars of corporate equity disappeared in less than 7 hours. The Dow-Jones Industrial Average lost 508 points in a single day. But this was only the most dramatic day in a week that saw the financial markets literally restructure themselves. This essay examines changes in the way financial markets should be interpreted in the post-crash environment.

Last Updated: 12/30/1987

The Crash, Risk and Monetary Policy

William Testa

Risk is always an important factor in the analysis of financial markets. It is also the hardest to get a handle on. However, there is little question that risk moves markets. And in some cases, such as the futures and options markets, it creates them. Between October 13 and October 19, investor perceptions of risk changed. This change in the perception of risk has altered price and return relationships throughout the financial markets. Put into the simplest terms, a 5% three-month Treasury bill rate (or a $100 share of stock) does not mean the same thing it did before October 19.