Abstract Six months after the market crash of October 1987, we are still sifting through the debris searching for its cause. Two theories of the crash sound plausible -- one based on a market panic and the other based on large trader transactions -- though there is other evidence that is difficult to reconcile. If we are to believe the market panic theory or the Brady Commission's theory that the crash was primarily caused by a few large traders, we must strongly reject the standard model. We need to build models of financial equilibrium which are more sensitive to real life trading mechanisms, which account more realistically for the formation of expectations, and which recognize that, at any one time, there is a limited pool of investors available with the ability to evaluate stocks and take appropriate action in the market.
Journal of Economic Perspectives – American Economic Association
Published: Aug 1, 1988
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