November 23, 2010Financial Marketby EconomyWatch

Financial Market Crash, Different Market Crash

Financial Market Crash essentially deals with stock market crash that is defined as a dramatic decline in stock prices across a sizable cross-section of the stock market. Crashes are often preceded by speculative stock market bubbles and are the outcome of both panics (crowd behavior) on the part of investors as well as underlying economic factors. Stock market bubbles are associated with periods of rising stock prices and economic optimism and where the price-earnings ratio exceeds long-term averages. According to various studies, stock market crashes are defined as self-organized criticality in the financial markets. Stock market crashes are social phenomena where extensive selling on the part of investors or extended periods of bear runs measured in months or years on the stock indices spell doom on the stock exchanges of the respective country leading to an ultimate crash or recession in the economy. However, stock market crashes and bear runs are not always concomitant.

Some of the well known Financial Market Crashes can be classified as follows :

  • Wall Street Crash of 1929 : The Wall Street crash occurred on Oct 29, 1929 and followed the period of the “roaring twenties” when the stock markets had been experiencing robust growth. Companies responsible for the stock market boom were the Radio Corporation of America (RCA), General Motors and investment trusts such as Goldman Sachs trading Corporation. From August 24, 1921 to September 3, 1929, the Dow Jones Industrial Average (DJIA) experienced a six fold rise from 63.9 to nearing 381.2 points. However, it became clear after a certain point of time that it was a mere bubble and Oct 24, 1929 (Black Thursday) felt one of the first shocking market drops. This was followed by Black Monday and Black Tuesdays on Oct 28 and Oct 29 which followed suit. While Black Monday experienced a fall of 12.8% on the DJIA, Black Tuesday experienced a day of chaos where the shares of the RCA and Goldman Sachs fell dramatically. Across the two days, the DJIA fell by about 23%.
  • Dow Jones Crash of 1987 : The crash on Oct 19, 1987 also known as Black Monday was preceded by strong economic optimism when the DJIA increased from 776 to 2722 from August 1982 till its peak in August 1987. The crash of Oct 19 started from Oct 14, Friday and continued for five days consecutively following its initial fall of 3.81% and 4.60% followed by Black Monday when the DJIA plummeted 508 points losing 22.6% in one day of intra-day trading. The S&P 500 dropped by 20.4% and the NASDAQ composite lost only about 11.3% largely due to the reason that NASDAQ market system failed. The crash is recorded as the greatest single-day loss that Wall Street ever suffered in the event of continuous trading. Between the start of trading on Oct 14 to the close on Oct 19, the DJIA had lost 760 points or a decline by over 31%. The 1987 crash had a worldwide phenomenon as the FTSE 100 Index lost by about 10.8% on Monday followed a decline of around 12.2% on the following day as all the world markets declined substantially. The collapse had mainly been blamed on program trading, portfolio insurance and derivatives and the prior information of an impending worsening of economic indicators.
  • Asian Economic Crisis or East Asian Financial Crisis of 1997 : It was a period of economic unrest that started in July 1997 in Thailand and South Korea with the collapse of Kia and gradually translated into falling stock markets and other asset prices in the economies of the Four Asian Tigers (namely Hong Kong, Singapore, Taiwan and South Korea). The economies of Indonesia, Thailand and South Korea were the most affected by the crisis with their currencies falling dramatically relative to the US dollar with the South Korean economy being hit the hardest. Trouble started brewing long before in the months of May and June when the Asian Tigers grew at an average of 8%-12% and attracted huge inflows foreign capital. The Thai Baht which was pegged at 25 to the dollar from 1985 to July 2, 1997 fell to its nadir at 56 to the US dollar at January 1998. The Thai Stock Market fell by about 75% in 1997. In the case of Philippines, the PSE Composite Index fell by about 2000 points in 1997. The Peso fell from about 26 pesos to the dollar at the start of the crisis to about 40 pesos at the end of the crisis. In the case of Korea, the Korean Won plunged from less than 1000 per US dollar to less than 1700 per dollar. By the end of 1997, the Kuala Lampur Stock Exchange (KLSE) lost more than 50% 1200 under 600 and the Malaysian Ringgit fell from 2.50 to under 3.80 to the dollar. In case of Indonesia, after the financial crisis of 1997, it had a severe impact on the Rupiah with continuing periods of devaluation which took the rate to 18000 Rupiah for 1 US dollar from the level 2000 Rupiah for 1 US dollar before the crisis.
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