Nicolae Sfetcu

A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.

Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions: a prolonged period of rising stock prices and excessive economic optimism, a market where Price to Earnings ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants.

There is no numerically specific definition of a crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days. Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. The crash of 1987 for example did not lead to a bear market. Likewise, the Japanese Nikkei bear market of the 1990s occurred over several years without any notable crashes.

Further reading

• Galbraith, John K. The Great Crash. Mariner Books, New York. ISBN 0-395-85999-9.
• Kindleberger, Charles P. 2000, Manias, Panics, and Crashes: A History of Financial Crises. Wiley & Sons, New York, NY. ISBN 0-471-38945-5.
• Shiller, Robert J. 2001, Irrational Exuberance. Broadway, New York, NY. ISBN 0-7679-0718-3.
• Didier Sornette, Why Stock Markets Crash. Princeton University Press. ISBN 0691-09630-9

References

1. Preliminary Observations on the October 1987 Crash, United States General Accounting Office (GAO). January 1988. GAO/GGD-88-38. p.14, p.36
2. U.S. GAO op. cit. p.55
3. Critical Market Crashes, D. Sornette. p.6
4. U.S. GAO op. cit. p.37
5. What caused the Stock Market Crash of 1987?
6. Stock trade patterns could predict financial earthquakes - MIT News Office
7. Mandelbrot, B. (1963) ”The variation of certain speculative prices” Journal of Business, XXXVI, 392-417
8. Mantegna, R.N., and Stanley, E. 1995. Scaling behaviour in the dynamics of an economic index. Nature 376(July 6):46.

Links

• Stock Market Crash Calculator
• Every Generation has its Crash
• Log-periodic power law bubbles in Latin-American and Asian markets and correlated anti-bubbles in Western stock markets: An empirical study.Anders, Sornette. International Journal of Theoretical and Applied Finance 4(6), 853-920(2001).
• A theory of power-law distributions in financial market fluctuations. Gabaix, Gopikrishnan, Pierou, Stanley. Nature, vol 423. 15 May 2003.

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Video: Stock Market Crashes October 2008! Are You Making or Losing $$?

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