A Study of Market Crises: Facts, Figures, and Economic Effects

This report provides a comprehensive analysis of major market crises from 1987 to 2011, examining their causes, facts, figures, and economic impact. It begins with an abstract defining market crises and reviewing relevant literature. The study investigates seven major crises, including Black Monday (1987), the 1990 crisis, the Russian crisis (1998), the dotcom crisis (2000), the 9/11 attacks, and the 2008 credit crunch. The research focuses on six major stock indexes (excluding China) and their performance during these crises, comparing recovery times, durations, and correlations. The methodology includes a research paradigm, approach, type, data collection and analysis, and ethical considerations. The findings highlight the commonalities and differences among indexes, particularly noting the strong correlation of European markets. The report examines the facts, figures, and causes of each crisis, including derivative securities, oil prices, corporate corruption, and easy credit conditions. The conclusion summarizes the key findings and offers recommendations for preventing future market crises, emphasizing the need for proactive measures by policymakers. The report also includes a literature review, methodology, data findings, and a section on learning reflections.

History of Market Crises:
Facts, Figures and Impact on the Economy

ABSTRACT
Stock Markets' behaviour usually functions as a leading indicator of economic and
financial crisis. The paper will define market crisis, make a literature review and discuss
various market crises that have been occur from 1987 to date and empirically examine the
consequences on major indexes, compare the results and focus on the effects on real
economy. The study examined the six major stock indexes of the major world economies
except China, for the past 24 years. During my research period, (1987 - 2011) stock markets
had experienced seven major crises and each one was lighter than the previous with the
exception of the subprime crash of 2008 that caused an analog to 1907 sell panic.
The research examines the black Monday 1987 crisis which was considered the
biggest one day crash in history, 1990 crisis which caused mainly by oil prices increase, 1998
crisis when Russian economy defaulted , 2000 dotcom crisis when tech stocks reached
bubble levels, 9/11 terrorist attacks crisis, and 2008 credit crunch.
According to the results, all major indexes need the same time to reach bottom,
recover to their pre-crash levels with few exceptions, and remain at the bottom similar period
of time. However, European markets are better correlate and especially the German and the
French Index in terms of time, recovery, duration and performance. US and European Indexes
have many in common but there are differences as well, while Nikkei deviates from all other
indexes.
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TABLE OF CONTENTS
CHAPTER: 1 INTRODUCTION..................................................................................5
1.1 Background of the study......................................................................................5
1.2 Research aims and objectives...............................................................................6
1.3 Rationale..............................................................................................................6
1.4 Potential contribution...........................................................................................6
1.5 Disposition...........................................................................................................7
CHAPTER: 2 LITERATURE REVIEW.......................................................................8
2.1 Introduction..........................................................................................................8
2.2 Market decline, market panic and stock market crash.........................................8
2.3 Bull or bear market characteristics and relationship with t panic and crash........9
2.3 Recession Vs depression....................................................................................10
2.4 Use of stock market for crisis prediction...........................................................11
CHAPTER: 3: METHODOLOGY..............................................................................16
3.1 Introduction........................................................................................................16
3.2 Research paradigm.............................................................................................16
3.3 Research approach.............................................................................................16
3.4 Research type.....................................................................................................17
3.4 Data collection...................................................................................................17
3.5 Data analysis......................................................................................................18
3.6 Ethical aspects....................................................................................................18
.CHAPTER: 4 DATA FINDINGS AND ANALYSIS................................................18
CHAPTER: 4 DATA FINDINGS AND ANALYSIS.................................................19
4.1 Crises..................................................................................................................19
4.1.1 The 1987 Black Monday crisis.......................................................................19
4.1.1.1 Facts and Figures.........................................................................................19
4.1.1.2 Causes..........................................................................................................19
Derivative Securities............................................................................................19
Program Trading..................................................................................................20
Illiquidity..............................................................................................................20
US trade budget deficit.........................................................................................20
Overvaluation.......................................................................................................20
4.1.2 The 1990 crisis................................................................................................21
4.1.2.1 Facts and Figures..........................................................................................21
4.1.2.2 Causes..........................................................................................................21
Oil Prices..............................................................................................................21
Demographics and the Deceiving Population......................................................21
The Tax Reform Act (1986).................................................................................22
High Leverages....................................................................................................22
4.1.3.The Russian Crisis of 1998.............................................................................22
4.1.3.1 Facts and Figures..........................................................................................22
4.1.3.2 Causes..........................................................................................................23
Decline in Exports................................................................................................23
Speculative Attack...............................................................................................23
Currency Crisis.....................................................................................................23
Budget Deficits.....................................................................................................23
Banking Crisis......................................................................................................24
4.1.4 The dotcom crisis of 2000...............................................................................24
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4.1.4.1 Facts and Figures..........................................................................................24
4.1.4.2 Causes..........................................................................................................24
Corporate Corruption...........................................................................................24
Overvaluation of Stocks.......................................................................................25
Microsoft Monopoly............................................................................................25
4.1.5The 9/11th Crisis...............................................................................................25
4.1.5.1 Facts and Figures..........................................................................................25
4.1.6. The Great Recession......................................................................................26
4.1.6.1 Facts and Figures..........................................................................................26
4.1.6.2 Causes..........................................................................................................27
Easy Credit Conditions........................................................................................27
Growth of Housing Bubble..................................................................................27
Fraudulent Underwriting Practices......................................................................27
Increased Debt Burden.........................................................................................27
CHAPTER: 5: CONCLUSION AND RECOMMENDATION..................................40
Conclusion................................................................................................................40
Recommendations to Prevent Stock Market Crisis..................................................41
SUMMARY OF LEARNING REFLECTIONS..........................................................43
REFERENCES.............................................................................................................44
APPENDIXES.............................................................................................................49
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CHAPTER: 1 INTRODUCTION
1.1 Background of the study
During the past thirty years world came across severe crises that had and still have
multiple social and economic effects. Crisis is a situation when economy experience sudden
downturn caused by financial crisis. It drop gross domestic product, liquidity crunch, falling
stock prices and have a drastic impact on the financial, economic, social and political aspect
However, on the other side, it offer opportunities to everyone that can discriminate the new
financial and socio-economic status after every crisis. They eliminate weak and less adaptable
companies, leaving free space for the future market leaders in all sectors of the economy.
Although social sciences, along with finance and economics have shown a considerable
progress during the last 100 years, however, collapse of stock prices has resultant economic
disruption. It found as a key factor behind great depression and recession. Recently, global
institutions like IMF and World Bank (2014) examine past financial crises to respond the
crises by identifying their key reasons and make better decisions to put closer supervision
mechanism. Stock market works as an early warning indicator of crisis, in which,
policymakers can examine current market trends with the historical occurrence and assess
economic stability. World Bank (2014) focuses on structural problems in the financial system
that deviates human behavior from making rational decisions.
Although there were number of studies, which examine the impact of crisis on the
economic output, still, none of the research pays specific attention on capital market crash
because of crisis. Thus, the key aim of the research paper is to examine all major market
crises from 1987 up to the late 2008 credit crisis that was a major one and almost all,
academics, politicians, economists and investors, agree that it was the worst since the crash of
1929 that caused the Great Depression. The ‘Black Monday’ of 1987, was followed by the
recession of 1990, the Asian crisis which started on 1997 and disrupted the economy of Asian
giants. The Asian recession was followed by currency crisis in Russia in 1998 in which
Russian domestic problems were held responsible for the crash. After the Russian crisis, the
dot-com bubble distorted the economy Worldwide which was due to the extreme
overvaluation of tech stocks in 2000. Another unexpected market crisis occurred due to
terrorist attacks of 9/11 and the impact was so severe that the stock market remained closed
for four days globally. Lastly, stock market crisis occurred in 2007 – 2008, also known as
credit crunch which triggered after a couple of years the eurozone crises. These various
incidents affected among others, the global economy, changed the way risk was considered,
and altered social status and market profile in many sectors globally.
The thesis will analyze indexes behaviour of the major capital markets before and
after the period of crisis and its impact on the economy. The study particularly focuses on
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analyzing 6 major stock markets including Dow Jones and S&P500 of New York Stock
Exchange, FTSE100, DAX30, and CAC40 of European Exchanges and Nikkei 225 of
Japanese Stock Exchange. The research will examine that how stock prices change during
various crises through key facts and figures. Moreover, it will find out that how stock market
pricing pattern and volatility can be use by economists as a tool of predicting future crisis.
Thorough examination of causes of recession and its impact on the economy will enable
researcher to present the most appropriate solution to respond it in the best way.
1.2 Research aims and objectives
The dissertation aims at critically examining the causes and impact of crisis on
economy, more importantly, six major capital markets of the world including Dow
Jones and S&P500 of New York Stock Exchange, FTSE100, DAX30, and CAC40 of
European Exchanges and Nikkei 225 of Japanese Stock Exchange.
Research objectives:
 To critically examine the key reasons of major crisis Black Monday crisis, 1990
crisis, Russian Crisis, dotcom, 9/11 crisis and great recession
 To examine the performance of selected major capital market before, during and post-
crisis period
 To analyze the impact of crisis on the economic results
 To recommend the best strategies to policymakers to respond crisis
1.3 Rationale
Previously, many researchers have tried to quantify crises in macroeconomic terms or
explain their pattern repetition. Fidrmuc and Korhonen (2010) investigated the impact of
global financial crisis on the business cycles and Reinhart and Rogoff (2009) researched the
economic results after crisis. However, both the studies did not specifically focus their
attention on collapse of major stock market. Thus, it is the main reason, which motivate
researcher to investigate how financial crisis damaged major capital markets of the world.
Moreover, no research has been undertaking that present key information about how stock
market volatility can be use as a predictive tool for crisis measurement. Thus, the study will
cover such gap by focusing key attention on the stock market.
1.4 Potential contribution
Critical evaluation of the underlying causes of crisis and its impact on the economy
will assist policy makers, monetary and federal authorities to respond such situation.
Moreover, the study findings and results can be used by academics, fund managers and
analysts in order to better interpret markets’ behavior on crises while, economists and policy
makers can use it to predict a market crisis, its duration and depth or even act proactively.
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1.5 Disposition
Chapter: 1: Introduction: This section of the study provides background details,
aims and objectives, rationale and potential significance of the study. With the help of this,
reader can generate an idea about the scope and key aspects covered by the study to achieve
the defined goals.
Chapter 2: Literature review: This section presents critical assessment of historical
academician’s researches and investigations about the key aspects such as stock market,
market crisis, recession, depression. This chapter gains crucial importance such as stock
market, market crisis, recession, depression and evaluate different authors point of view about
the causes and impact of market crisis on economy.
Chapter 3: Methodology: The section outlines the research methods, tools and
concepts including data collection and data analysis method that researcher used to complete
the investigation.
Chapter: 4: Data analysis: It is the most important chapter that present key facts,
figures and trend of all the selected major stock markets before, during and post-crisis. Its
detailed evaluation will enable researcher examining the trend and assess that how stock
market behave at different point of time and alert policymakers against possible market crisis.
Chapter: 5: Conclusion and Recommendation: The thesis ends with conclusion
summarizing the key findings of the study undertaken. Based on it, policymakers, economist
and federal authorities will be recommending for the most suitable strategy to protect the
economy against crisis.
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CHAPTER: 2 LITERATURE REVIEW
2.1 Introduction
Literature review section presents thorough and in-depth analysis of the
historical research papers and academic’s researches that help to build critical
arguments. This section focuses on key aspects including market crisis, market panics,
market crashes, recession and the key reasons behind crisis.
2.2 Market decline, market panic and stock market crash
A market decline is a logical consequence of a market uptrend in technical terms or a
negative fundamental issue. Prices drop or decline after achieving the saturation point is
market declining. However, stock market crash is not similar to this, even market crash and
market panic are not describing the same market event. Crashes are often a logical
consequence of a speculative market bubble that could bring fundamentals to an irrational
extreme level as measured by P/E and P/BV ratios, market capitalization or dividend yields.
Stock market crash is a rapid decline in the prices of shares that traded on recognized stock
exchange due to panic selling. It lost investors confidence on the market due to unexpected
events such as prolonged inflation, political uncertainty, hysteric speculation and others.
Stock market crashes and panics are a result of human behavior. Actually, a result of
the reaction of the crowd of investors where fear brings selling which brings more selling
pressure and the result is a crash or a panic. Both they have to do mainly with human
psychology and less with market fundamentals. Barben and Odean (2000),reported that
overconfidence among investors resultant excessive trading level at poor performance. Out of
66,465 households with large discounting broking during 1991-1996, investors who trade
excessively earned an annual return @ 11.4% only against the market return of 17.9%.
However, average household get an annual return @ 16.4%. The results show that
overconfidence is the main reason behind poor performance, which reported that excessive
trading is hazardous to wealth.
Besides this, Kahenman reported that availability biasness affects investors in
forming crash beliefs. The study demonstrates that in order to form prediction, people uses
some possible arbitrary value and make necessary adjustments, which is often insufficient.
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Availability heuristic is a tendency to utilize recalled events in order to measure the
probability of an event. Not all the people have equal memories to retrieve resultant biased
estimates. It is particularly pertinent in the area of investment decisions to assess probability
of different events like likelihood of riskier events that affect investors in allocation of fund to
different assets or securities. Such differences results in poor estimation of predicting market
crash.
2.3 Bull or bear market characteristics and relationship with t panic and crash
Bull markets are periods of 2-5 years of market trading where the general level of
prices increases, in contrast, Bear markets are periods of the same time length where the level
of stock prices declines. Bear or Bull markets of 2-5 years are called cyclical, while Secular
Bull or Bear markets are referring to longer period, usually to 12 – 17 years. Usually a crash
leads to a cyclical bear market, confirming the top after a long period of advancing prices.
In technical terms investors consider that a bear market has occurred when prices
drop bellow Simple Moving Average of 200 SMA(200) trading days and a bull market when
prices rise above SMA(200). Sometimes market participants use the word “panic” means
sharp decline in share prices. It is the result of the fear among investors that in future; market
will further go downward. Unlike stock market crash, it does not necessarily require
evaluating market conditions and stock market fundamentals. In a stock market, market panic
definition is a decline of 20% or more in a very short period, i.e. within a month. As an
example, SPX declined 30% in 3.5 weeks after the collapse of Lehman Brothers. Panics need
already low prices and weak markets. In the Lehman panic of 2008 S&P500 had already
declined more than 20% as it was in a cyclical bear market. On the contrary, side, market
crash is a major sudden decline of a strong market, after a rally and usually near the end of
long-term (secular) bull markets. In stock-market terms, crash is defined as decline in major
index by 15 % or above just in few days. Unlike this, stock market decline is a gradual
decline in prices, although sometimes crashes can occur in a decline.
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Amadeo (2017), demonstrates that the rapidity of decline in stock prices under market
crashes distinguished it from the stock market correction which occurs when stock market
prices go down by 10% o more over some days, weeks or even months. The study presented
that crash take place at the end of the extended bull market. Evidencing it, the study reported
that stock market crash in 1929 is the result of 25% decline in share prices within just 4 days ,
called Black Thursday. Moreover, in 1987, Black Monday crash is the result of 2.4% drop in
share price in one-day. In this, market decline had begun 5 days before the crash when DJIA
dropped by 3.81%. It took 2 years to come back to its pre-crash level. Market crash of 20%
or above tends to lead towards bear market and bring recession to the economy.
A sell-off is a rapid selling of securities, such as stocks, bonds and commodities
within a day or two due to an unexpected , for the market participants, event. Disappointing
financial results or an unexpected event could lead to a market sell-off. On the basis of the
findings, it is clear that market Crisis can be define as a sudden unexpected drop in prices of
more than ten percent (> 10%) in a few days. Thus, market crash is definitely a market crisis
because it suddenly results in falling prices while a market sells - off does not necessary leads
to a market crisis. In fact Market Crashes and Panics may lead to major market crisis, while
repeated sell offs could lead as well to market crisis.
Many-times market crises lead to recessions. A recession is a contraction phase of the
business cycle, or "a period of reduced economic activity." The U.S. based National Bureau
of Economic Research (NBER) defines a recession more broadly as "a significant decline in
economic activity spread across the economy, lasting more than a few months, normally
visible in real GDP, real income, employment, industrial production, and wholesale-retail
sales. An on – going recession may turn to a depression.”
2.3 Recession Vs depression
In economics, recession simply means slowdown economic activities or adverse
economic growth. It is the result of falling demand and may be associated with falling prices
(deflation), or sharply rising prices (inflation) or a combination of rising prices and stagnant
economic growth (stagflation). A severe or prolonged recession refers to an economic
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depression. Although the distinction between a recession and a depression is not yet clear, it is
often that a decline in GDP of more than 10% constitutes a depression. The current case of
Creek economy is certainly an example of depression since its GDP has decreased 25% from
2009 – 2013.
A widespread decline of economy lasting for few months is recession whereas
depression is a severe decline lasting for some years like a decade. Amadeo, (2017), stated
that stock market crash lose investors confidence and if it is not restored with continue falling
price over a sustainable period, then it would result beginning bear market and push economy
towards recession. It is mainly cause by lack of consumer confidence, downward
unemployment, bankruptcies, failure of businesses and others.
Recessions and Booms in economy are following each other in an endless cycle.
Policy makers, central bankers and economists are dealing with these cycles and there are two
major schools of Economic thought. Liberal Economists consider tax cuts to promote
investments while Keynesians consider government spending to increase growth. The late
case of Eurozone recession and the economic policies applied has been in long debate
worldwide. Austerity measures could drive an economy into a death spiral as experience has
shown after 1929 and policies of that time. On the other hand the late US government
spending and QE measures with zero interest rates taken by Fed after the collapse of Lehman
in 2008, has resulted US economy to avoid recession , but it skyrocketed US debt to 17.6
trillion dollars today.
2.4 Use of stock market for crisis prediction
Many times stock markets performance is a leading indicator of the real economy in
each country. Since 1948, ten recessions were preceded by a stock market decline, by a lead-
time of 0 to 13 months with the average of 5.7 months (Siegel et al 2001). However, in the
last two decades major stock market crises lead to financial crises. Markets always recover
after a crisis. While extensive research has been undertook on financial crises, few things
have been perform on stock market crises. Literature on Financial crises deals primarily with
the causes of crises, the changes in economic variables and stock returns while some
researches focused on the changes of benefits to diversification and the international market
connections and interrelations.
Fama (1989) suggest that the 1987 US market crisis occurred when fundamentals i.e.
negative macroeconomic data about global economy changed. Guillermo Calvo (1998)
suggests that a sudden stop in international credit flows might bring financial crises, while
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Rudiger Dornbusch (2001) identifies three external causes of crisis, Public and Private
Balance Sheet Problems and a governmental disinflation program that causes a currency
appreciation. He correlates asset prices with macroeconomic fundamentals during war
currency prices that lead to stock market crisis.
According to Bennett and Kelleher (1988) stock market price volatility increases
during crashes and that high volatility increases stock markets’ correlation among them. Also
Calvo(1996) states that market crisis are the result of an unsustainable economic program ,
while Krugman (1979) developed the famous balance - of - payments model to explain a
similar view. Fisher (1933) examined nine factors, including interest rates and price levels
that led to the big crash of 1929, while Van Troop Smith (1936) blames the unbalanced
budget particular during a depression, for the big crash of 1929. Shiller (1987) states that the
majority of investors – 72% of the individual and 84% of the institutional - thought that the
market was overvalued before the 1987 crash, means that investors realized that the market
was overheated before the crash, yet the majority maintained their stock positions.
Abreu and Brunnermeier (2001), stated that asset bubbles can persist over a
substantial period of time despite the presence of rational agents during a market crash and
despite the fact that they know that the bubble must burst. However most analysts and
practitioners believe that stock markets are highly correlated, especially since the 1990 and
those worldwide declines and advances in equity markets confirms it.
According to Coudert and Gex (2007), financial crises can predict because they
believed that the risk aversion indicators remain high after the crises. Patel and Sarkar (1998)
found important differences in the characteristics of the stock market crises between
developed and emerging markets. All crises are associated with contagion and most
individual markets are in crises when the regional market is also in crisis. Hans Voth (2002)
found that political risks increased dramatically over the period in the 10 most developed
countries, and as a result the fear felt by most of the people and thus from investors increased
volatility more than 40% in Germany and 20% in US markets in prices in 1932.
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Fear is the result of social unrest, political violence, anti-government strikes,
demonstrations and revolution of the period. This is a highly significant predictor factor of
increasing volatility. Sometimes weak government balance sheets lead to crises, a factor that
is common in all member countries of South in Eurozone after 2009. Experienced market
Pros consider the price of Gold in order to estimate investors’ attitude towards risk , while
others check the volatility of the options as an indication of the investor’s behavior towards
risk. VIX (Volatility Index is the implied volatility of the S&P500 index.)
The Director of the International Monetary Fund’s Policy Development and Review
Department Jack Bormann (1999) in his Commentary “Cutting the Risk of Global Market
Crises” suggests “a new international financial architecture” for its member countries and
international organizations that is devising a set of reforms.
Foreign currency reserves should be in an appropriate level to meet sudden currency
outflows that could destabilize an entire economy. It pays attention to market contagion,
which is the spread of a market crisis to many countries within a short region, as occurred in
the Asia crisis of 1997. Member countries should maintain the line given by IMF: maintain
appropriate fiscal and monetary policies and financial system, control their foreign debt and
deficits, successfully manage their currency reserves and attract private funds.
Risk aversion is another factor that correlates with stock markets. It can be use as the
common factor driving risk premia. Principal Component Analysis (PCA) and Volatility
Index can be use to evaluate such behavior. In order to see if all or some of these indicators
work, construction of an “early warning signals table” of crises might be appropriate. Andrew
Farlow (2003) suggests” bubbles have played, and continue to play a key role in crises and
particular by distorting balance sheets.” Bubbles “develop when arbitrage …becomes
excessively risky”. He believes that commercial banks, central banks, and mutual Funds
create those bubbles especially in stock markets and real estate, and states the examples of
Japan and US. Credit crunch was a shock for markets, economists, analysts, bankers and
politicians. Very few people predict it and nobody forecast its size, spread and breadth.
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There are two main schools of thought regarding the causes of the credit crisis, as it
can be seen from the papers and articles published. The first “school of thought” supports that
the origin of the crisis is the real estate sector and more specifically the ownership houses in
the US. The second “school of thought” supports that the real estate sector is just one of the
causes but not the origin of the problem, but rather the accelerator.
Peter Lerner (2008) argues that the refinancing of the short-term consumer debt using
home loans pulled the trigger for the financial crisis. Lerner moves a step further and points
out that “few in our profession, noticed that the current crisis of the US financial system
undermined the paradigm of rational expectations”, a straight forward blame for the
professors and the teachings in business schools that consider mass failures impossible
following the rational expectations theory.
However, on the critical note, Lucian A. Bebchuk (2008) supports “a superior
alternative for restoring stability to the financial markets and protecting taxpayers” by
redesigning “the legislation based on four interrelated elements: no overpaying for troubled
assets, addressing under-capitalization problems directly, inducing infusion of private capital
and market based discipline”
Cambell R. Harvey (2008) criticized TARP is “an insufficient policy initiative to end
the current credit crunch” and sees a need for modifications that should be made during the
program implementation. Cambell suggests several measurements such as to “abandon the
hold to maturity target purchase price and obtain the trouble assets at a price closer to fair
value, establish a Bank Capitalization Fund. with $200 – $300 billion recapitalize FDIC,
guarantee all demand and savings deposits for a period of three years, ....reestablish the
Resolution Trust Corporation” and postpone for 2 years all mortgage prepayment penalties.
A strong supporter of the first “school of thought” is Jan Kregel (2008) who argues
that the crisis in the housing market of US actually is a danger,” threatens” the US financial
system. Kregel et al (2008) supports that as long as the number of mortgages kept on
increasing then housing market was stable since prices went up due to excessive demand. But
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the terrorist attack of 9/11 and the change in accommodation policy by the Federal Reserve
brought up the first foreclosures in 2006 and then as housing prices started to fall. As a result
foreclosures increased, prices decreased more and collateralized products to mortgages
collapsed.
Austin Murphy (2008) argues that the origin of the credit crisis is one of the complex
financial products, called Credit Default Swaps (CDS). Murphy et al (2008), conduct a close
financial Analysis and suggested that the factors that caused the collapse of CDS were the
unrealistic assumptions that led to mispricing and the fact that it was unregulated.
Foreclosures that started in 2007 were just the “catalyst” of the crisis along with a liquidity
crisis. The size of the problem according to Murphy’s calculations is $5 trillion plus one
trillion for every year of recession and the total cost of the crisis “could exceed $10 trillion”
During 2008, FED and US government have spentthree trillion dollars in bail out
programs but he suggests that credit crisis is “of epic proportions” and suggests that “financial
managers of the future should be better educated in the art of credit analysis”. Bardhan (2008)
suggests that after the Great Depression the housing ownership supported by all US
governments for sociological and political reasons. Home ownership promotes respect for law
and order, provides stability to the system and is the main asset of the household wealth.
According to Bardhan (2008), it was a political decision to support home ownership. Thus
interest rates was kept –among other reasons – at low levels from FED and when the central
bank decided to increase the cost of money , foreclosures increased to record high , complex
financial products that lied on mortgages collapsed , financial institutions went bankrupt and a
liquidity crisis raised, that soon turned to be a credit crisis that spread globally.
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CHAPTER: 3: METHODOLOGY
3.1 Introduction
The methodology section gains crucial importance, which presents key
methods and tools, applied for the study by the researcher for the investigation. It
includes philosophy, approach, data collection and analysis method.
3.2 Research paradigm
Interpretivism philosophy believes that reality is easy to observe through the
subjective interpretation and analysis of key aspects. Thus, by this way, it support
qualitative investigation and preferable in the field of social science. Unlike this,
positivism paradigm is useful in scientific investigation that says that a researcher
must work objectively to examine reality. Thus, it is useful in quantitative researches.
The key aim of the present study is to explore the causes and impact of crisis
on economy and examining the key pattern of the stock prices during, pre and post-
crisis period. Thus, researchers analyzed all the results objectively using any scientific
or statistical tools, thus, positivism paradigm had applied. In this, stock market pattern
studied and examined through coefficient measurement, correlation, Chow breakeven
test and others. Researcher defined crisis as a situation, in which, market declines
above 10% from its previous level. It is a midway between stock market crashes and
panic, because crash is the situation, when stock falls by 15% or above, in contrast,
panic is a decline by 20% or more. Market panic is a major contributor to the stock
market crash cause economic turmoil and instability.
3.3 Research approach
Deductive and inductive are the two research approaches that may apply by an
investigator, first works on moving generalization towards specification, also known
as top-down approach. This approach draw logical conclusion from the facts &
figures. Unlike this, inductive approach moves from certain specific observation to
general theories, models and concepts. The theory is helpful in stimulating
investigator’s cognitive ability.
In the current study, deductive approach is use wherein specific observation is
focus by addressing the underlying stock market trend before, during and after crisis.
With the thorough or detailed analysis of the same, researcher will be able to
determine that how stock market serves as a warning indicator to predict possible
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crisis in the economy. It helps finding out the right solution to respond crisis and
overcome its damaging impact on the economy.
3.4 Research type
Quantitative and Qualitative are the two research kinds that scholar generally
undertakes. Qualitative is an exploratory research that helps in gaining deeper
understanding of the key reasons, motivations and opinion and provides insight to the
problem. It is of great tool to develop new ideas and hypothesis. Such research studies
are use to uncover the hidden trends in the opinion and thoughts to dive deeper into
the chosen research issue. It either can be base on unstructured or semi-structured
techniques like group discussion, interview, observation and others.
Qualitative research, on the other side, quantifies the problem through
presenting numerical data or details that are easy to transform into statistical details.
The research quantifies opinions, attitude, behavior and other major variables and
generalizes the results of sample. It makes use of measurable statistical data in order
to formulate key facts. Such scholars make use of extremely structured data such as
online survey, mobile survey, paper survey, telephonic interviews, face-to-face
interview, website interceptors, systematic observation, longitudinal studies, online
polls and others.
Considering the current research problem, key statistical information about the
stock market results during the period of major market crisis had used in a
quantitative study. The study was a longitudinal design because the selected six major
stock indexes repeatedly observed and analyzed for a long period. In order to gather
data, researcher used longitudinal design by examining stock market trend for a time
of 27 years from 1st of January of 1984 to 31st of January 2011 for the six selected
mature stock market indexes.
3.4 Data collection
There are two ways for gathering necessary information for any research,
primary & secondary. Former, as name itself, require original research for obtaining
newer data set. Survey, interview, participant observation and others are the popular
tools of primary data gathering. The strength of it is that specific information can be
acquire, however, its downfall side is that it takes too much time and cost as well.
Unlike this, secondary data is about use of already existing or already
researched information that does not require surveying target respondents. Using
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academician’s literature, research papers, online resource, stock market data,
companies report, industrial statistics are the sources of secondary data.
Considering the current research problem to assess stock market performance
during, before and post crisis period. Thus, only secondary sources can be use to
determine pricing trends of stock markets. In this regards, all the data set have been
collected from the “e-signal” software provider. However, it is not easy to study all
the stock markets, therefore, the study focuses only on the 6 major capital markets
including Dow Jones and S&P500 of New York Stock Exchange, FTSE100, DAX30,
and CAC40 of European Exchanges and Nikkei 225 of Japanese Stock Exchange.
Such indexes have been chosen because these all are the wealthiest economies of the
world. The sample size is 325 monthly observations for each index. It presents
changing stock market pattern and use as a magnitude to analyze the market
relationship with the crisis period.
3.5 Data analysis
Since the research period is in decades and in the end, monthly charting is the
most appropriate and it is widely used by analysts. Monthly price data of each one of
the capital markets indexes has been examine separately to study the reasons behind
crisis and evaluate the quantitative behavior of six major stock markets. The results
present key market statistics, charts and graphs to visualize stock market trend for the
selected sample period. The study presents all the six major stock indexes represent
the six major and most developed economies of the world with the exception of China
and their cross study would provide a reliable quantitative measure on how developed
stock markets perform during crises.
3.6 Ethical aspects
The key ethical concern for every research is maintaining confidentiality that
had followed by the researcher. Besides this, all the secondary sources that had used
in research given full credit through using Harvard referencing style. It also prevents
the use of copied and pasted data in the thesis. All the information used for the study
kept in a secure place to prevent any possibility of misuse of critical business data.
.
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CHAPTER: 4 DATA FINDINGS AND ANALYSIS
4.1 Crises
4.1.1 The 1987 Black Monday crisis
4.1.1.1 Facts and Figures
Stock market crisis of 1987 is also referred to as ‘Black Monday’ which has
been the biggest one-day stock market crash in history of the world. It affected the
economies around the world and resulted in the loss of over $500 billion. The stock
market crash had started from Hong Kong, spread across Europe, and finally hit
United States. The business philosophy of that time rested upon a strategy of
acquisition of other companies. It was believed that companies would only grow if it
purchased smaller companies for the prospect of achieving high growth. Therefore,
companies started to sell junk bond to the public which had higher rate of returns due
to high-risk default (Barro, 1989). Then they invested the money which was gained
from junk bonds to acquire smaller firms. Initial Public Offering (IPO) became a
common trend. Microcomputers were considered a revolutionary tool that would
change lives of people around the world. Therefore, investors as usual were
considering that the stock market would always increase, keeping all other factors
constant. These trends made enchase program trading which is considered to have
played a major part in crashing the stock market (Metz, 2003).
The crash was observed between October 15 to October 19 and Federal
Reserve intervened to repair damage and all the money was recovered at the end of
1989 which were lost in the stock crisis (Metz, 2003).
4.1.1.2 Causes
Major causes of 1987 crisis are :
Derivative Securities
The presidential task force was appointed to investigate the matter of crash on the
stock market. The task force initially revealed that derivatives’ market and spot market did
not synchronize well which had caused the stock market to crash. Previously the trend was to
19

purchase the actual shares which were then converted into purchasing or selling the rights of
shares. This prompts the fluctuation in stock prices even though the shares are not actually
owned by the people; the phenomenon is referred to the use of derivatives. This had been one
of the major factors to cause in stock market crisis (Metz, 2003).
Program Trading
It is believed that program trading is the principle cause to trigger the stock market
crash in 1987. Program trading is referred to as ordering large number of stocks which is
often used by large institutions and performed through computers. As the use of computers
grew at a larger number, the dependency on program trading grew significantly amongst the
Wall Street companies (Metz, 2003).
Illiquidity
In between the crash of the stock market, a large number of orders were received
from people to sell their stocks but financial markets did not have the capability to handle
such large flow. The stock market opened late that morning because it could not find any
buyers to purchase stocks which were being sold by sellers. Trading was concluded for many
stocks. Therefore, a significant price drop was felt in stocks which resulted in poor liquidity
(Metz, 2003).
US trade budget deficit
On October 14, the treasury secretary had announced a trade deficit of US budget
which resulted in the fall of the value of dollar in foreign exchange. The particular fear causes
people to sell their assets which were marked by US dollars which led to increase the interest
rates in the country (Barro, 1989).
Overvaluation
Many analysts considered that stocks were overvalued. The price dividend
ratio was too high in 1987 compared just to the previous years. Normally, the
historical average P/E ratio of SPX is 14 while in 1987 was well above 20. Analysts
considered that the overvaluation must have played a smaller part in the stock crisis
but it had not been the sole reason (Metz, 2003)
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4.1.2 The 1990 crisis
4.1.2.1 Facts and Figures
The recession started off on July of 1990 and ended on March of 1991. The recession
followed an expansion of ninety-two months and was counted as the third major expansion
after the Second World War (Frumkin, 2010, pp.243). There were several events that gave
origin to the 1990 world recession. The events included weak international trade policies,
failures of financial institutions, the Persian Gulf War and the stock market crash of 1987, that
gave emergence of 1990s recession. According to Carl Walsh (2003), the crises were the end
of the American peacetime where there was low consumption, high in-debts, and thick
interest rates to downturn the economic levels. The affect of the recession was felt in the
entire economics mechanism which later on brought the set back of stock markets and
institutional investments. The recession was not restricted to US but its impact was carried all
the way to Europe, Australia and Central Asia (Walsh, 2003).
4.1.2.2 Causes
Oil Prices
The recession began with the expansion of the earlier 1980s downturn. The Persian
Gulf War triggered oil uptrend as it was the time when Iraq invaded Kuwait, escalating the oil
prices from a normal price setting to a higher price distinction (McNees, 2007). The prices
distracted the economic situation as America tried to seclude Iraq from Kuwaiti region,
distorting the political reforms of oil with Iraqi government (Kamery, 2004). This impacted
the consumer behaviour as a lag in consumer confidence was felt all over the world. The
pressure was high in the US side of the regime, where consumers showed a back off from
investment and sales and purchase activity. The statistics posed impressions on consumer
behaviour where GNP at first quarter of 1989 was not more than 2 percent. This slowed down
output and productivity and hence was one of the main causes of recession (Kamery, 2004).
Demographics and the Deceiving Population
It was " baby boomers" generation that brought an increase in demand on housing and
construction sectors (McNees, 2007). The recession of 1981-1982 retreated construction work
and hence compelling the demand more than the past decade (McNees, 2007). The economic
tax policies of 1986-87 deduced federal taxes by 25 percent and income tax rates by 15
21

percent also pumped up the investor and so as the demand on the construction side. All of this
gave a rise to the 1990 recession, as the period was having more disguising demand for the
slowing rate population. The population which was earlier increasing got decreased to three
million in 1980 and 1.5 million in 1991. This was a deception of population which gave a
contraction to the 1990 recession (Kamery, 2004).
The Tax Reform Act (1986)
The Tax Reform act of 1986 was one of the major causes of 1990 recession. The act
devalued depreciation allowances, and weakened the capital incomes on regular investments
(McNees, 2007). Thick taxes shortened the life span of the business and it also brought
degradation of the employment level (Walsh, 2003). The act also implemented passive loss
rules by which the taxes on house building were raised instead of decreasing (Kamery, 2004).
As a result banks imposed high interest rates on house building loans. Thus Tax Reform act
played a major part in bringing the 1990 recession (Walsh, 2003).
High Leverages
Leveraging was the central invader of 1990 recession as it boosted discrediting and
high in-debts, which came out as consequential drivers of the 1990 recession (McNees, 2007).
It was leverage that held the trust of investors. This paranoid situation compelled the
recession and hence was counted as a major cause of the 1990 downturn (Walsh, 2003).
4.1.3.The Russian Crisis of 1998
4.1.3.1 Facts and Figures
The financial crisis in Russia is referred to as currency crisis and took by surprise
many analysts because Russian economy was expanding when crisis occurred. In 1997, the
country was fighting hard against inflation to maintain stable exchange rate. In 1998 rubble
collapsed tremendously which halted its economy (Zonis, 2010). The severity of the crisis can
be measured by the impact of the crisis to different economies of the world. The Baltic States
including Belarus, Kazakhstan and even economy of United States were affected by the
Russian crisis. However, analysts have yet to decipher the accurate reason for the collapse of
the economy and were unable to decide if it was internal or external reasons that caused the
crisis. The steps taken to face the crisis involve devaluing the rubble and providing a
22

moratorium for the payment of debt to its foreign creditors (Mankoff, 2010). Many analysts
believed that the Russian crisis was due to the crash of Asian economy, however, no links
have been found with Russia and East Asia in respect of trading and exchange. An economy
of country A can only disturb the economy of Country B if there is a presence of bilateral
trade which was nowhere to be seen. Therefore, it was concluded that the crisis was mainly
due to its own domestic problems (Aslund et al., 2010).
4.1.3.2 Causes
Decline in Exports
Trade Balance widened when oil prices slammed in 1997, since oil and natural gas
constituted about 30% on total exports. Exports' decrease was observed even before the crisis
of Asia and no necessary steps were taken by the government to stabilize the trade balance
account..
Speculative Attack
Due to the Asian crisis investors were resisting to invest in emerging markets and so
foreign direct investments declined, prices of the Russian assets became low and interest
rates started to rise (Zonis, 2010).
Currency Crisis
The largest part of debt was public and only 35% was private. Therefore, the
government had to purchase the currency from private sector which increased the demand of
currency and increased its price. This caused the devaluation of Rubble. The government
further devalued rouble to bring rates to market level. However, the following month a sharp
depreciation of the currency was recorded due to inflation, bad debt and decrease in the
strength of financial sector (Zonis, 2010).
Budget Deficits
An increase in government and a decrease in tax revenues since people were
avoiding paying taxes and economic activity were decreasing caused an increase in Budget
deficit. Therefore, government was forced to borrow money in order to meet the expenditure
(Zonis, 2010).
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Banking Crisis
The foreign debt by Russia had increased by 30% in 1998 and at that
particular moment the devaluation of rouble damaged Russian economy. Tokobank
was the first bank to file for bankruptcy causing Russian Central Bank to offer
excess liquidity loans to save failing banks (Zonis, 2010).
4.1.4 The dotcom crisis of 2000
4.1.4.1 Facts and Figures
The dot-com bubble also referred to as Tech Bubble or Internet Bubble caused the
stock market to crash in 2000. The era of 1990 to 2000 was the rise of internet websites and
tech based companies (Colombo, 2012). After the stock market crash of 1987, the stock
markets around the world were led by computer technologies in assessing their stocks. The
new technologies of personal computers were becoming the most important tool for the
business and everyday life . Many companies started their operation designing computer
software with huge profit margins. Many small start-ups were reported because of huge
profits, and the bubble increased at a fast pace which made many investors wealthy
(Colombo, 2012).
Then the internet age started as the cheapest way of communication in different
locations via email and other software. Investors saw this opportunity as profitable and many
companies including American Online (AOL) expanded the use on a large scale. Companies
offered their shares publicly and many investors became millionaire overnight due to IPO's .
DJIA rallied and many companies that were having losses before going public , made
millions after their IPOs. Soon investors realized that it's a speculative bubble and had to burn
someday. On March of 2000 the stock market crashed (DeGrace, 2011).
4.1.4.2 Causes
Corporate Corruption
Multinational internet companies had many loopholes in their accounts, many times
debts were never shown and millions of dollars were made through illegal means and fraud.
The companies that had hidden debts affected the market because they were never honest in
their dealing with investors (Rodrigo, 2012).
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Overvaluation of Stocks
Between 1982 and 2000, Stock markets experienced a secular bull market that leads
P/E ratios to bubble levels. The average price to earnings ratio of S&P 500 index, which
includes the 500 bigger blue chips globally, reached 44, with its historical average on 14.
The race towards IPO became a normal trend for internet companies that had limited
or no history or even not a clear business plan and yet were receiving millions by investors for
possible new ideas in the internet business. The valuations of stocks were extremely high that
could be measured in a way that the ideas which were written in a sheet of paper could be
sold for millions. This has been the major factor for the bubble to pop (Colombo, 2012).
Microsoft Monopoly
A tremendous monopoly was reported by Microsoft, as it was the only company that
was providing computer software and hardware at high prices. The company had
implemented a strategy of gaining the complete market share. However, a case was filed
against Microsoft for making billions through illegal monopoly. Many analysts believe that
the stock market crash began after Microsoft was held responsible for illegal monopoly by the
court. The stock market dropped 10% after the incident and it never got static (DeGrace,
2011).
Markets’ Capitalizations shrunk. Within 3 years, 8 trillion were lost while
U.S., E.U. and many other economies went into a recession.
4.1.5The 9/11th Crisis
4.1.5.1 Facts and Figures
The terrorist attacks of 2001 were performed by a group known as Al-Qaeda and the
aim was to threaten United States in supporting Israel and to step out from Saudi Arabia. On
September 11 2001, a total of 19 members of Al-Qaeda hijacked 4 passenger aircrafts from
different destinations. Two aircrafts were hijacked from Boston, one from Washington DC
and one from Newark. Two of the passenger aircrafts were headed towards the World Trade
Center, one aircraft towards Pentagon and other crashed in the field of Pennsylvania. The
World Trade Centre was completely destroyed by these attacks, whereas, the Pentagon was
partially damaged. The economy started to worsen in United States , the stock market crashed
25

by 600 points and remained closed for four consecutive days after the attack. Since then, the
essence of risk changed globally .
4.1.6. The Great Recession
4.1.6.1 Facts and Figures
The credit crunch of 2007 is considered to be the strongest recession after the Great
Depression of 1930. The credit crunch resulted in the bankruptcy of top financial institutions,
Bear Sterns and Lehman Brothers, while other like Citigroup, AIG were very close to
bankruptcy. This would have had a domino effect as Banks and other financial institutions in
US, Europe and Asia are interconnected and interrelated and the global economy would easily
collapse. US government along with Fed decided to intervene through bailout packages,
lowering rates to zero, and QE programmes to assist US and World economy to recover from
financial crisis. Housing market industry suffered greatly due to credit crunch since
government policy of easy mortgages created a housing bubble. The financial crisis spread all
over the world and major economies shrunk and entered recession.
Unemployment in US rose to record level of 9.3% and economy shrunk 2.8 (in 2009)
while factory orders, new permits, durable goods and all macro indicators collapsed. The
same happened in Europe mainly in South a couple of years later as credit crisis spread,
known as eurozone crisis. All economic regions of the world were affected as millions of
people worldwide lost their jobs and world economy was one-step away of depression.
All countries reacted strongly to financial crisis; they decreased their spending and
increased their tax rates, made reforms and major central banks lowered rates very close to
zero to boost lending( Fed, ECB, BoE, BoJ) and launched bond buying programmes to give
liquidity in a world economy under shock.
The crisis had started off from United States bubble crisis but had impacted the
overall economy of the World. Iceland had been the country which was greatly affected by
credit crunch, whereas, Arab countries were the least affected countries around the world that
had easily survived financial crisis (Doyran, 2011).
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This crisis can be divided into two stages. Stage one occurred during 2007, because the crisis
has its origins in the real estate market of USA, in the mortgages to low income borrowers .
Stage two started with the collapse of Lehman Brothers, on September 16th, 2008 which was
the 4th largest US financial company at that time.
4.1.6.2 Causes
Easy Credit Conditions
The government had announced policies for easy credit in which lower interest rates
were charged in order to encourage borrowing. Many people were allowed to buy houses who
could never have afforded a house through easy lending of money. A shock to the financial
system occurred when prices of these houses began to fall, many people lost their jobs and
were unable to pay their mortgages which defaulted and created a housing bubble (Jones,
2009).
Growth of Housing Bubble
Due to the high demand of American houses, an increase of 124% of prices was
recorded in the housing industry. The government had introduced a policy for easy
purchasing of houses which resulted in the increase of prices but at unsustainable levels.
Therefore, the bubble had to burst at a certain amount of time , the crisis triggered and many
people could not refinance their homes and defaulted (Jones, 2009).
Fraudulent Underwriting Practices
The Business Chief Underwriter stated on the Parliament that 60% of mortgages
bought by Citigroup were not according to legal underwriting policies. It was reported that
these defective mortgages were increased by 80% since the beginning of 2007 (Jones, 2009).
Increased Debt Burden
The financial institutions were highly leveraged before the crisis and they had
reduced the power of retaliating against major losses. The financial institutions were using
complex financial instruments based on algorithmic derivatives which were problematic for
creditors to even understand, not to mention to decrease risk generated by these institutions.
The top five US banks managed to increase their leverage and their exposure to financial
shocks. $4.1 trillion were reported to have been in debt for the top 5 banks of US which then
received government support, except Lehman Brothers which was liquidated (Doyran, 2011).
27

Murphy (2008) illustrates that the decline of property value was a chance for banks to
get back their loans given on very low interest rates. He explains that the root of this recession
was the liberalization of the restrictions of mortgages which lead to huge borrowing from
households and businesses. However, the government interest rates on properties especially
homes kept increasing simultaneously. By 2004-2005, the home interest value reached to
70% which is out of reach for many. At this point, the bank realized that there is no liquidity
of properties which they have acquired from their loan takers (Murphy, 2008).
Mauldin (2007) in his global market report explains a different picture of global
crisis explaining that the failure of banks to revitalize their assets forced to devaluate them.
The banks secured properties which were not equal to the value paid by these banks. Rather
than looking at solutions to increase the interest of buyers, they added interest on all
properties. This method for recapturing banks money further discouraged buyers and pushed
them into one of the biggest crisis in the world’s history (Mauldin, 2007).
Mizen (2008) takes into account the banking structure to discover another side of this
recession . He explains that the change in banking model from “Originate and Hold” to
“Originate and distribute”, which is termed as ‘Securitization’ is also one of the prime causes
of the 2007 Credit Crunch. Banks gave loans to economic entities to buy and when they were
unable to pay the loans, securitized the properties to overcome the problem. Then the property
was sold to another buyer. This distribution policy failed when buyers realized that the
property they have bought does not have the value they have anticipated. Hence, the bank
once again got the same property but with decreased value (Mizen, 2008).
Another viewpoint can be from the angle of “The Black Swan Theory” as explained
by Booth & Mazzawi (2008), that devaluation of properties is not the effect of high interest
rates but of poor assets and money regulation. The regulatory authority failed in calculating
the risk involved in loan stimulation and then chose the wrong strategy of distribution. The
risk mortgage lending penetrated the market in early 2004, but Regulatory Authorities waited
before they can get a good return value for their loans, which eventually resulted in a total
financial destruction (Booth & Mazzawi, 2008).
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Data Analysis
As we can see from table one, crisis of 1987 started in the middle of October. Indexes
topped on October the 9th with the exception of Nikkei 225 which topped on October the 16th.
Nikkei’s differentiation can be explained from the fact that the Japanese Stock Exchange was
in a different cycle: the trend was bullish; the Japanese economy was growing at fast rates
while real estate was the driving force. 1987 had proven as a strong period for the stock
market crash continued to bull market begun in 1982. Use of program trading by institutions
in order to protect themselves from the market weaken was the main reason behind such
crash. Besides this, illiquid markets, excessive valuation, market psychology were the
secondary factors for market collapse. On Monday, DJIA plummeted by 588 points and
recognized as 8th worst stock market crash in the US history. That was the first time when the
market falls by more than 500 points just within two days, however, at the same time, the
most important thing that was discovered is that it has outer performed than other major stock
indexes in US i.e. S&P 500 & Nasdaq.
In Europe, every stock market performed worst during that period whilst in Asia,
Japanese Stock exchanges droped 895 points. October 19, 1987 was a terrible day as Dow
Joines plunged 22.6% by 508 points to 1,738.74 just in one-day, which was the sudden
decline. Rising interest rate, computerized trading, five-year bull market started in 1982
without considerable correction brought market panic by sudden decline in the product prices.
Black Monday is a significant crisis in the history due to its not only swiftness & severity
effect but also because it weakened trading system. With reference to FTSE 100 Index, 19 th
and 20th October were recognized as the two-largest fall in the history when market dropped
by more than 20 pc over just few days. It started on 9th October 1987 at the beginning point
of investing revolution as rapid extension of population’s access to invest in stock market. In
1986, deregulation of London market switched to electronic trading. Such “Big Bang” fell
29

trading costs due to increase in competition level, which soared trading volume. FTSE
dropped by 10.8pc and 12.2 pc on the next day (Connigton, 2017). Although the exact reason
behind such crash is unknown, still, excessive valuation and exacerbated sales because of
upcoming of computer trading were two major reason behind such stock market crash. After
breaking the threshold point, computer system automatically started stock selling that drive
share price lower and collapse index.
It is important to mention that Nikkei had its major all times top two years later, in
1989, and have never reached that level again since then. Going back to the Black Monday,
prices topped on October 9 and bottomed 14 days later for DJIA and SPX, while FTSE100
bottomed after 35 days and Nikkei 225 after 28 days.
The recovery period was too long: US markets needed 19 and 22 months respectively
to reach before –crisis levels while FTSE100 and Nikkei 225 both needed 23 months. DJIA
retraced 39.2%, SPX 500 34.15%, FTSE100 36.85% and Nikkei225 23.02% because it was in
a major bullish trend.
It’s very interesting to notice that before the beginning of the crisis all indexes
had rallied for a year, from 49.23% (Nikkei225) to 32.1% (SPX). However, next
year's performance was negative: 10.41% for the SPX, 13.37% for the DJIA and
22.05 for the FTSE100. Only Nikkei225 had a positive performance of 3.49%.
The impact of ‘Black Monday’ was not catastrophic. Only a few numbers of
businesses went bankrupt while US unemployment was uneffected. A huge sell-off slowed
down the economy growth. US markets lost 30% of their capitalization but New Zealand's
market top losses loosing 60% of its capitalization and recovered after many years (Metz,
2003).
The crisis did limited new IPOs and 45% of companies postponed their intention of
converting their business to public limited but did not cancel their plans. It also reduced the
amount of cash from the markets but overall the long lasting impact was absent. NYSE
30

introduced advancements to control program trading which strengthened the stock market and
brought back the confidence of investors (Metz, 2003).
The 1987 crisis crash turned to the market bubble and moral hazards and it leads to
the great financial crisis. The crash of 1987 leads to the recession of the US economy in 1990.
US economists have a common theory which reveals that there was some disputes amongst
G7 nations for monetary policy in which United States had a plan to prop up the dollar value
and restricting inflation and to develop policies that could strengthen their economy than the
Europeans. Therefore, United States had to pressurize Germany and other European countries
to change their monetary policy as well which then became one of the factors that made
investors nervous. However, this theory is in relation with the stock market crisis of Hong
Kong where it all started which was backed up by dollars. Hence, when the Hong Kong
market collapsed, the panic began to fall upon the European countries that had dollars to
support their market as well (Shiller, 1992).
1987 Crash has a catastrophic impact on the economy. It not only affects US
economy but also affects outside economies like London & Hong Kong market fell by 45.8%
and 26.4%. However, some analysts argue that the major effect of the 1987 crises were the
fall of US and European bond markets. Companies often opt for financing through internal
sources which can be considered as their retained earnings (Leary & Roberts, 2010).
However, if a company considers its internal sources for funding inefficient then turns to
external sources i.e. through borrowing and debt financing. The theory of Pecking order
reveals that when businesses opt for obtaining debt financing then they would have to
evaluate outcomes and benefits associated with. Finally US economist Richard Roll believes
that due to huge borrowing made by companies through banks their focus shifted towards
debt financing instead of their stocks (Leary & Roberts, 2010).
Both US stock market Indexes DJIA and SPX peaked on July of 1990, found their
bottom on October after 82 days of the same year, but they didn’t match on their recovery
period. Dow needed 6 months to recover while SPX only 4. They declined 22.49 % and
20.33% respectively.
31

In Europe, the three major indexes topped the same day the US indexes did, but they
bottomed on different days. DAX30 and CAC40 needed 14 months while FTSE100 needed
5 months. They declined 24.68%, 18.77% and 30.01% respectively. On the other hand Nikkei
toped the exact same day all indexes did, it bottomed very close to US indexes but declined
40.39% and had never recovered since then. At that time Nikkei was near its top secular bull
market (toped in 1989) and has a very different market cycle since then.
At the time of recession the impact was felt first in the US and then to different parts
of the world including Australia, UK and central Europe. It affected first the institutional
investing organizations (Frumkin, 2010) then manufacturing and service sector.
Unemployment and GDP deficit increased while consumer behaviour was heavily affected
(Kamery, 2004). The overall impact was carried all the way to the next decade (McNees,
2007) while high oil prices affected foreign exchange markets and international trade
activity. Economists blamed the Tax reform act of 1986 to be the cause of the recession while
others set the blame on intrinsic factors like financial institutions , Fed and State owned
organizations for the 1990 recession.
Afterwards, the 1998 Russian crisis was a major one as we can see from data
analysis. DJIA retraced 21% and SPX 22.44% in 34 and 39 days respectively. Dax30 retraced
38.17% , FTSE100 25.62% and Cac40 34.58% in 39, 39 and 32 days respectively, while
Nikkei lost 23.42% in 39 days . Nikkei225 retraced less than the other major indexes of the
developed capital markets because it had already been in a major bear market since 1989 and
Japan were not among major creditors of the Russian government.
The recovery period took 5 months for all indexes while bottom happened on
different days : DJIA and SPX bottomed on 27 of November , Dax30 bottomed on 17th of
December, FTSE100 on 8th of January of 1999 and CAC40 on 30 of April of 1999 five
months after US indexes. If we analyze the annual returns before and after the crisis we will
notice that all indexes rallied the year before the crisis: Dax30 rallied 59.31% while DJIA
only 10.16%. Nikkei225 retreated 19.76%.
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After crisis all major indexes reached historic high levels except Nikkei225. The top
performance a year after the crisis was 22.08% by DJIA but DAX30 had a negative yearly
performance of 17.11% while Nikkei225 rallied 7.16%. The synchronization of the markets
was impressive as we can see from the data analysis, although not perfect. Indexes had a
very similar course and we can figure out that their correlation has been increased if
we compare this crisis with past crises.
The major impact on the economy of Russia was the devaluation of Rubble.
Moreover, the interest rates rose to over 100% , the prices of goods were increasing and
income level fell by 15% and spending power slammed . Unemployment rate increased and
GDP shrunk again. The value of the Russian assets hit all time low because foreigners
refused to invest in Russia due to economic crisis (Mankoff, 2010).
The Baltic countries went into deep recession because their exports slammed since
Russia were their largest trade partner . Food manufacturing companies were highly affected
(Zonis, 2010). Similarly, Kazakhstan's main trade partner was Russia and forced to devaluate
its currency to maintain its competitiveness in the financial market. Half of the country’s
reserves were spent to attain a market level (Mankoff, 2010). US stock market corrected on
Russian crisis and interest rates were high again but Federal Reserve forced the economy
back on track (Aslund et al., 2010).
Komulainen (1999) discusses that the main prospect of Russian crisis was the federal
budget deficit that was long standing. These deficits were the reason of financing short term
domestic debt. Therefore, the insolvency of government increased and extra financing were
made possible from the central bank which caused the crisis to occur (Komulainen, 1999).
However, Zonis (2010) have a viewpoint that Russian crisis had already been started to stir up
when Asian crisis had hit the Asian nations. He believed that due to the devaluation of Asian
currencies the Russian currency similarly suffered the same scenario because Russia was at
the border of Asian countries. However, Aslund et al, (2010) has provided various counter
arguments that the economy of one country can only be affected by another country if there is
33

bilateral trade among those two countries. Otherwise, there shall be no affect on the economy.
But there is a probability that Russia had been engaged with other Asian nations privately and
had not revealed that private relationship (Aslund 2010).
Actually the countries that had large amount of trade with Russia were almost
bankrupted (Komulainen, 1999).
Aslund et al, (2010) describes currency crisis theory as speculative attacks on
the currency of a country which results in the depreciation of the currency and
revenue losses. Similar conditions occurred during the Russian crisis (Aslund 2010).
Rapid use of internet, excessive advertisement by technology companies were the
most important reason behind stock market bubble. It is because, excessive usage of internet
and technologies had created a euphoric attitude towards the business and inspired e-
commerce as a future growth opportunity. Overconfidence, failure of dotcom establishments
caused tech bubble. All major indexes topped at the beginning of 2000. DJIA topped on
January the 14th while SPX on March the 24th. In Europe FTSE 100 topped on 30th of
December, 1999 while Dax30 on March the 10th and CAC40 on September the 8th of 2000
, while Nikkei225 topped on 14th of April, 2000 as well. The duration of time needed to
recovery was between 78 and 88 months: FTSE100 needed 78 months, Dax30 87months and
in US DJIA needed 82 months and SPX 88 months. In any case, declines were huge; Dax 30
lost 73.11% form its top, while DJIA lost only 38.75%.
All indexes required 31 to 38 months to reach their final bottom, with the only
exception of DJIA, which needed 22 months only. With the exception of DJIA that
experienced its lowest price level at October 11th of 2002 and actually “ lead” the recovery
worldwide and thus was the first index to experience new historic highs 5 years later, all other
indexes bottomed at the same day, on March the 14th of 2003!
An increased correlation among major Stock indexes is a fact regardless that
involvement of private investors was extremely high worldwide and the use of internet and IT
technology was so extensive. According to cycles theory, dotcom market crash ended the
34

secular bull market that started in 1982 and signaled the beginning of the next secular bear
market.
Many communication companies filed for bankruptcy and the stock market recorded
a loss of $5 trillion in capitalization in two years. The third largest bankruptcy in the history
of US was filed by WorldCom which was considered as a major player in internet companies.
The company tried to make illegal changes in its financial accounts but the information got
out in public and the company shares were dropped tremendously. Many people lost their
jobs, the tech index Nasdaq 5000 crashed from 5,000 to 2,000 while trillions of dollars got
plunged. A company by the name of ‘Microstrategy’ lost the price of shares drastically from
$3,500 per share to $4 per share (Sornette, 2003).
Struggling dot-com companies were either acquired or merged with other companies
while others changed their names and their association with dot-com not to earn a bad
reputation. For instance, Pets.com, Webvan, and others were failed and gone into liquidiation,
However, Cisco and Qualcomm had lost a significant portion of market captialization, still
survived. However, companies such as eBay and Amazon.com recovered and surpassed such
bubble. The companies that were categorized as small dot-com companies survived the
downturn because they were much immersed in a bubble like big players (Hephaestus Books,
2011). Fed cut off interest rates to assist economy to recover.
A reform was made by the government in which CEOs of the company will be
accountable for its investments and revenues collected. This stance was taken for companies
who covered their loopholes and kept hiding their hidden debt which became one of the
reasons market crashed. The companies were asked to clearly display their accounts to
prevent fraudulent activity. The penalties were also increased for companies if they ever be
involved in a fraud. (Colombo, 2012). US economy stopped to expand , unemployment
rate started to increase from 4% (30 year low) to 5% and then 5.85% ( in 2002) and
consumer confidence decreased.
35

The most important thing to be aware of is the fact that world capital markets were in
the middle of a major downtrend after the dotcom bubble crash at the beginning of 2000. As
a result the yearly returns before the crisis were negative for all the indexes while the yearly
returns after the crisis were negative as well. DJIA retraced 11.47% before the crisis and
12.93% after the crisis , while SPX retraced 25.46% before and 19.19% a year after the
crisis. They retraced 21% on average during the crisis.
In Europe Dax30 retraced 35%, FTSE 100 23% and CAC40 30% A worst
performance compared to US indexes even though the terrorist attack was made against the
US and inside the US for the first time in history. Only the British FTSE 100 performed
analog to the US indexes (-22.94%).
Annual returns before and after the crisis was :
DAX30 ( - 29.36% , - 28.43% ) , FTSE100 ( -21.34% , - 20.91%) and CAC40 (-
31.18%,-28.22% ). In US DJIA ( - 11.47% , - 12,93%) and SPX ( -25,46% , - 19.19%)
performed similarly.
On the other side Nikkei225 performed much in line with the other mature capital
markets. Annual returns before and after the crisis were negative ( - 36% and –10.21%) while
the retracement was similar to the US markets, (-17.46%). As long as it concerns the
beginning of the crisis the date was the same, 31st of August while the days to bottom
were 21 for all indexes except the FTSE100 that needed 73 days. DAX required the
least time to recover, 4 months, followed by CAC40 (5months) while Dow and
Nikkei both required 6 months .
9/11 attacks had long and short term impact on economy and every day life of
Americans and Europeans as well. Crisis management became very important, risk increased
globally, economies stopped to expand, US economy shrunk 1.3% consumer confidence
slammed, Government spending increase dramatically to support war against terror and Fed
increased money printing.
36

President Bush, spend about $865 billion and the amount kept on rising. When
Obama was appointed as US president, he asked for $477 billion for the War on Terror which
was more than half of the expenditure done by former president Bush. Up till now, $1.3
trillion have been spent to fight against terrorism which excludes the amount of $851 billion
which were used in defence and security of its homeland (FCIS, 2011).
US debt increased and more money than ever invested in defense and security. The
unemployment rate increased again (after 2000 crisis) as many big financial institutions filed
for bankruptcy because the government was unable to repay their debt (Gross, 2005). The
insurance companies were greatly affected by the 9/11 crisis. Many major players in the
industry including Berkshire Hathaway, Lloyd’s and other firms lost a large portion of their
market share and competitiveness. The industry reported almost $32 billion of losses which
included the compensation of workers, properties and their liabilities. However, the insurance
industry had their own reserves which were kept for recessionary periods. Many companies
were reluctant to save funds for the future terrorist attacks because the idea seemed to be very
expensive (Gross, 2005).
Due to terrorist activities which led to the hijacking of various aircrafts, people
avoided to use airplanes. Many small airline companies filed for bankruptcy just after the
attacks. Layoffs had become a common practice for companies that were facing near
bankruptcy phase due to which tens of thousands of people became unemployed.. Flights
were also grounded for a particular period of time and packages were announced for the
families of victims (Roach, 2011).
Tourism in US and specially in New York City was greatly affected by 9/11 attacks
as many people refused even to travel. The businesses that were located closer to World
Trade Centre affected mostly and nearly 18,000 small businesses in the city were wiped off
from the map. Even the people from other States were hesitant to visit the New York City for
the fear of another attack (Morgan, 2009).
Suleman (2012) argues that the terrorist attacks of 9/11 not only brought the stock
market crisis but it also influenced the debt crisis and increased the spending rate of US
37

government on inflated defence security. In his research, ‘the impact of terrorist attacks on
stock market crisis’ Suleman (2012) reveals that the severity of a stock market crisis can be
judged through the particular country’s investors to re-evaluate their risk (Suleman, 2012). He
argues that due to the terrorist attacks of 9/11, people of America were highly shocked with
the incident because they never considered any threat for US homeland.
Mota (2012) argues that the country is still been affected by terrorist attacks of 2001
because the country’s policies had dramatically been changed and more influence was put on
making a strong security and defense system.
Gross (2005) defines that the insurance sector of US were mostly affected in
monetary terms because they had to pay for filed claims on injuries during the attacks. Thus
top insurance companies had lost major part of their reserves and were saving a lot of money
for the next possible attacks. Financial sector were hit as well as cyclicals and durable goods .
Price of gold entered a new secular bull market.
Capital markets were already in a secular bear market, when the credit crunch hit
them. As a result, the yearly returns before the crisis were again negative for all the indexes
while the yearly returns after the crisis were positive since there is high probability that credit
crunch accelerated the secular bear market and all major market experienced their long-term
bottoms.
DJIA retraced 17.80 % before and 9.24% after the crisis while SPX retraced 20.06
% and 9.35% a year after the crisis. During crisis Dow retraced 42.46% and S&P500
45.18% . In Europe Dax30 retraced 39.83%, FTSE100 32.80 % and CAC40 40.85%, while
Nikkei retraced 41.72% . European Indexes performed better than US indexes during crisis.
Another very interesting point is that one year after the collapse of Lehman DAX
outperformed all indexes since it had a positive return of 1.29% whereas FTSE had negative
of just 1.83% pointing out that the problem had to do mainly with the US. However, German
DAX certified the excellent performance and the fast recovery of the real economy in
Germany.
38

On the other side, Nikkei 225 has not recover yet pointing out the problem of Japan’s
stagflation. Annual returns before and after the crisis were negative (- 24.87% and –10.21%)
while the retracement was similar to the US markets, (- 41.72%). The beginning of the stage
two of the crisis was 16th of September (Monday) after the collapse of Lehman Brothers,
As a result, all Indexes bottomed on 9th of March 2009 with a small deviation of FTSE which
bottomed on March the 3rd 2009, proving an incredible correlation among stock markets once
again. They all bottomed after 6 months. US indexes required 13 months to recover,
DAX30 12.5 and FTSE100 17 months while CAC40 typically recovered after 17
months.
The stock market of US was going north in 2007 as DJIA was above 14,000.
However, due to the financial crisis the stock market crashed in two years and reached 6,600
points. Analysts compared the crash with that of 1929. Dow Jones decreased by 50% in 17
months which was similar to 54.7% stock market decline under 17 months in 1929. However,
many believed that the decline of stock market had been much faster in 2007 as compared
with the Great Depression (Doyran, 2011).
The household wealth of the entire nation of United States had been declined by
$14trillion. The majority of households, who had a substantial amount of wealth in real estate
and in stocks witnessed severe losses . People became highly indebted to banks when the
prices of American houses crashed facing a serious default risk (Jones, 2009).
The financial crisis spread all across Europe : major indexes crashed, banks in
Ireland, Belgium and Iceland filed for bankruptcy, unemployment raised to record levels
slowly but steadily and many businesses specially in the South went bankrupt . Euro crisis
triggered in late 2009 with the huge deficit of Greece and after 2 years Spain, Portugal, Italy
and Ireland imposed austerity programmes that some are still in progress.
The crisis spread all over the world since US economy is the key player in global
economy and directly affects world trade and consumption. All developing and developed
economies were affected to some degree.
39

CHAPTER: 5: CONCLUSION AND RECOMMENDATION
Conclusion
The examined crises have been triggered from different causes, but had major impact
in local economies and changed, in some cases, local and global financial and economic
policies as well as the way risk is considered. “Black Monday’ caused by program trading
and US trade deficit, the recession of 1990 was mainly caused by rising oil prices while
1997 Asian crisis caused mainly by huge external debts and poor monetary policies.
Russian crisis triggered when Russia defaulted, tech crisis triggered when market
reached bubble levels and 9.11 when terrorists attacked world trade centre in NYC. Finally,
late 2007-2008 crisis started due to housing bubble in United States. The political decision of
supporting home ownership wealth ideology with any cost , the use of complex financial
products to get high yields, a rather loose legislation from SEC , Fed’s loose monetary policy
and SEC’s adoption of Fair Value Accounting that brought market volatility into financial
statements were the main causes of the most severe crises after 1929.
The main outcomes of past financial crises that can be drawn, as the International
Monetary Fund suggests, are the following: “Globalization has increased the frequency and
the number but not the breadth of the financial crises and their spread in money and capital
markets. There is greater efficiency when the central banks interference is ahead of the crises
and the late credit crunch confirms it.It’s difficult to determine the extent of negative
economic outcomes a crisis has especially to the real economy. The legal authorities are not
able to predict the innovation of new products and services in the financial sector and
therefore they are not in a position to prevent neither the crisis nor the effects on real
economy.”
Financial Market Crises definitely deviate from efficient market hypothesis in the
short and medium term. Markets fall and rise in a similar way and percentage, topped and
bottomed mostly the same day or week and have similar negative and positive annual returns
before and after each crisis. Stock Indexes correlation increases as we move on from past to
current crises and they have similar recovery periods.
40

There are differences in the percentage declines but none could rise while others were
declining, pointing out that crisis spread fast to all developed markets and economies causing
similar problems.
Furthermore each crisis is less severe than the previous one in terms of percentage
decline ; it takes less time on average for the indexes to recover and less time to reach
bottom. With One exception, the late credit crisis, which seems to be the worst after Great
Depression. The findings of the paper suggest that cooperation among governments and
Central Banks should increase radically, financial legislation should be global and more
attention should given to stock markets since it is a leading indicator of economic
implications.
Recommendations to Prevent Stock Market Crisis
 Many stock market crises have occurred due to the rapid pace of investors investing
in stocks. Considering the dot-com bubble, many companies followed the trend and
went public through offering their shares by Initial Public Offering. A restriction
should be made on investors for not investing in shares of the companies until the
person has financial backing to prevent them from bankruptcy (Markides, 2012).
 Accountability should be practice for everyone that involves investors in risk bearing.
The accountability of CEO should also be conducted for not indulging in to
fraudulent activity and to make fraud with investors. American Online made the
biggest fraud due to which many people lost their trust on the company, which
resulted in low price of shares (Taleb & Martin, 2012).
 Companies should have a proper savings which could help them in getting out of
financial crisis instead of taking help from government. The Federal Reserve should
only be use in critical situation to save the economy because it also puts burden on
the government to manage funds (Taleb & Martin, 2012).
 The policy should not be focuses upon providing easier loans to people because many
people hurry to invest their money in new business opportunities and are unlikely to
41

repay their debt. People become highly indebted due to high borrowing and the whole
economy gets in to trouble (Taleb & Martin, 2012).
.
42

SUMMARY OF LEARNING REFLECTIONS
After the present credit crunch triggered a massive sell off in the global markets, I
was surprised that very few experts were able to predict it, and I was very curious to see if
this was the case with all market crises. Thusly, I decided to make a research paper from
1897 until 2011, with available data on major stock indexes of the US, Europe and Asia, to
see if any correlation existed. I examined 6 major indexes, DJIA, SPX, FTSE100, CAC40,
DAX30 and Nikkei255 before , during and after each crises from 1897 to 2011 and
discovered that each crisis was less severe than the previous one with the only exception of
the present credit crunch, and that in terms of duration, days to bottom, days to recover and on
percentage basis.
I was also surprised to see that all crises had severe implications in the real economy,
the way they were triggered and how neighbouring economies were affected. It was very
challenging to me, I had to do a lot of detailed work, and many times, I thought I wouldn't
make it. My driving force leads to a surprising conclusion. This driving force is that this study
might be useful to some people in order to predict a future crisis coming. I knew that stock
markets are leading indicators as I have been working with them for the past 20 years,
proving it was a different thing.
There was a lot to be done: extensive research is needed and a backward testing from
the 1897 panic until today is a must, while a deeper research on economic effects is
necessary. As a market professional, I though US markets were stronger, as they are more
mature and liquid than all the rest, but the numbers proved that when a crisis triggers there
is no safe heaven. This project is just the introduction of a similar series of research that has to
be done to conquer market crisis and for sure an extensive knowledge of finance and
economics is needed, to analyse the social aspects of the economic implications.
During the past 2 years I felt tired and excited, lost and found, happy and sad many
times. I had to rethink on my motivation, re establish my criteria and the most difficult thing,
to observe things as they are and not as I thought they should be. I definitely expanded my
thinking and my reflective abilities to learn , understand and realise my personal learning, to
seek and familiarise myself with new ways of understanding knowledge and finally I learned
to reflect to problems and implement a multiple way of thinking I wasn't aware of. The
experience was definitely worth it!
43

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48

APPENDIXES
In each table we spot the price action of the main indexes. What day and
price the crash occurred , when it bottomed and how long it took, the total
loses in percentage , the day, price and time needed to recovery, and the
annual returns before and after the crash each index had.
TABLE 1
1987 crisis N/A N/A
Dow Jones 30 S&P 500 DAX 30 FTSE 100 CAC 40 Nikkei 225
Beginning of crisis - date 09-Oct-87 09-Oct-87 09-Oct-87 16-Oct-87
Beginning of crisis - price 2,658 328 2,399 26,647
Bottom of crisis - date 23-Oct-87 23-Oct-87 13-Nov-87 13-Nov-87
Bottom of crisis - price 1,616 216 1,515 20,514
Date of recovery 4-Aug-89 14-Jul-89 8-Sep-89 8-Apr-88
Price of Recovery 2,687 331 2,435 26,926
Months to recovery 19 22 23 23
Days to bottom 14 14 35 28
price decline in percentage -39.20% -34.15% -36.85% -23.02%
Annual returns before 38.43% 32.10% 47.96% 49.23%
Annual returns after -13.37% -10.41% -22.05% 3.49%
The flash - crash of 1987 caused almost 39% decline in Dow Jones in just 14 days,
37% in FTSE in 35 days and "only" 23% in 28 days in Nikkei.
TABLE 2
1990 crisis
Dow Jones 30 S&P 500 DAX 30 FTSE 100 CAC 40 Nikkei 225
Beginning of crisis - date 20-Jul-90 20-Jul-90 20-Jul-90 20-Jul-90 20-Jul-90 20-Jul-90
Beginning of crisis - price 3,024 369 1741 2,430 2,036 33,187
Bottom of crisis - date 12-Oct-90 12-Oct-90 16-Jan-90 28-Sep-90 18-Jan-91 05-Oct-90
Bottom of crisis - price 2,344 294 1,312 1,974 1,425 19,782
Date of recovery 19-Apr-91 15-Feb-91 13-Apr-92 08-Mar-91 30-Apr-92 N/A
Price of Recovery 3,030 370 1742 2,480 2,042 N/A
Months to recovery 6 4 14 5 14 unknown
Days to bottom 82 82 179 68 181 75
price decline in percentage -22.49% -20.33% -24.68% -18.77% -30.01% -40.39%
Annual returns before 13.57% 5.69% n/a 5.13% n/a -4.36%
49

Annual returns after 1.86% 6.25% - 4.08% 4.77% -13.17% -29.47%
The 1990 crisis started on July , caused declines from 20.33% (S&P500) to 40.39%
( Nikkei 225) and 5 to 14months for Indexes to recover and return to pre-crisis levels.
Annual returns before the crisis were relatively small from 5.13% to 13.57%. The
price action of Nikkei225 was mainly affected by a local crisis as real estate prices
collapsed and the Index has not yet returned to that time price level.
TABLE 3
1998 RUSSIA
CRISIS
Dow Jones 30 S&P 500 DAX 30 FTSE 100 CAC 40 Nikkei 225
Beginning of crisis - date 24-Jul-98 24-Jul-98 24-Jul-98 24-Jul-98 24-Jul-98 24-Jul-98
Beginning of crisis - price 9,367 1,190 6,199 6,183 4,404 16,698
Bottom of crisis - date 04-Sep-98 09-Oct-98 09-Oct-98 09-Oct-98 02-Oct-98 09-Oct-98
Bottom of crisis - price 7,402 923 3,833 4,599 2,881 12,787
Date of recovery 27-Noe-98 27-Noe-98 17-Dec-98 8-Jan-99 30-Apr-99 9-Apr-99
Price of Recovery 9,379 1,192 6,443 6,195 4,431 17,166
Months to recovery 4 5 5 5 5 5
Days to bottom 34 39 39 39 32 39
price decline in percentage -20.98% -22.44% -38.17% -25.62% -34.58% -23.42%
Annual returns before 10.16% 21.44% 59.31% 21.45% 38.99% -19.76%
Annual returns after 22.08% 19.02% -12.01% 5.35% 5.58% 7.16%
The Russian crisis on October of 1998, crashed the indexes, causing declines from
21% (Dow Jones) to 25.62% ( FTSE100) and 38.17% (DAX30) in just 5 weeks on
average. Indexes needed 5 months to recover, while annual returns before the crisis
were fairly good from 10.16% (Dow Jones ) to 59.31% ( DAX30). Only Nikkei had
negative returns before the Russian crisis.
TABLE 4
2000 DOT COM
CRISIS
Dow Jones 30 S&P 500 DAX 30 FTSE 100 CAC 40 Nikkei 225
Beginning of crisis - date 14-Jan-00 24-Mar-00 10-Mar-00 30-Dec-99 08-Sep-00 14-Apr-00
Beginning of crisis - price 11,750 1,552 8,136 6,950 6,944 20,833
Bottom of crisis - date 11-Oct-02 14-Mar-03 14-Mar-03 14-Mar-03 14-Mar-03 02-May-03
Bottom of crisis - price 7,197 788 2,188 3,277 2,401 7,603
Date of recovery 06-Oct-06 20-Jul-07 20-Jun-07 13-Jul-07 Still under 24-June-15
Price of Recovery 11,870 1,555 8,131 6,754 unknown 20,952
50

Months to recovery 82 88 87 78 178
Months to bottom 22 36 36 38 31 36
price decline in percentage -38.75% - 49.23% - 73.11% - 52.85% - 65.42% - 63.51%
Annual returns before 23.70% 31.94% 58.67% 37.84% 47.44% 56.05%
Annual returns after 34.95% 42.20% 78.51% 36.44% 52.57% 89.99%
The dotcoms' crash caused a major decline to all indexes but in 2 ( Dow Jones) and 3
years period approximately ( S&P500, CAC40, Dax30, FTSE, Nikkei225). Indexes
experienced major declines in percentage terms, from 38.75% ( Dow Jones) to 49.23
(S&P500) , 65% ( CAC 40 and Nikkei225) up to 73.11% in DAX30. Yearly returns
before the crash were very high and one of the causes of the crisis.
TABLE 5
9/11 CRISIS
Dow Jones 30 S&P 500 DAX 30 FTSE 100 CAC 40 Nikkei 225
Beginning of crisis - date 31-Aug-01 31-Aug-01 31-Aug-01 31-Aug-01 31-Aug-01 31-Aug-01
Beginning of crisis - price 10,441 1,186 5,455 5,475 4,963 11,366
Bottom of crisis - date 21-Sep-01 21-Sep-01 21-Sep-01 13-Nov-87 21-Sep-01 21-Sep-01
Bottom of crisis - price 8,062 944 3,539 4,219 3,463 9,382
Date of recovery 08-Mar-02 04-Mar-05 06-Jan-02 30-Sep-05 03-Feb-02 08-Mar-02
Price of Recovery 10,663 1,224 5,537 5,508 5,012 12,010
Months to recovery 6 30 4 49 5 6
Days to bottom 21 21 21 73 21 21
price decline in percentage -22.79% -20.40% -35.12% -22.94% -30.22% -17.46%
Annual returns before -11.47% -25.46% -29.36% -21.34% -31.18% -36.00%
Annual returns after -12.93% -19.19% -28.43% -20.91% -28.22% -10.21%
Terrorists attack caused major declines in the Indexes from 20 - 35% in just 3
weeks(except FTSE) and 4 (DAX30) to 49 (FTSE) weeks to recovery.Pre -crisis
annual returns were negative since dotcomms' crash decline was in progress,
TABLE 6
THE CREDIT CRISIS
Dow Jones 30 S&P 500 DAX 30 FTSE 100 CAC 40
Nikkei
225
Beginning of crisis - date 16-Sep-08 16-Sep-08 16-Sep-08 16-Sep-08 16-Sep-08 16-Sep-08
Beginning of crisis - price 11,193 1,215 5,965 5,204 4,169 12,048
Bottom of crisis - date 09-Mar-09 06-Mar-09 09-Mar-10 03-Mar-09 09-Mar-09 10-Mar-10
Bottom of crisis - price 6,440 667 3,589 3,497 2,466 7,021
Date of recovery 21-Apr-10 23-Apr-10 06-Apr-10 31-Aug-10 16-Feb -11 4-Mar-13
51

Price of Recovery 11,217 1,217 6,252 5,225 4,121 12,283
Months to recovery 13 13 13 17 23 53
Months to bottom 6 6 6 6 6 6
price decline in percentage -42.46% -45.18% -39.83% -32.80% -40.85% -41.72%
Annual returns before -17.80% -20.06% -20.79% -17.25% -24.52% -24.87%
Annual returns after - 9.24% -9..35% +1.29% - 1.83 - 6.12% - 13.98%
All indexes globally experienced a major crash in September of 2008 with Lehman
Brothers' bankruptcy . Indexes crashed about 40% on average in just 6 months, and
needed 13 ( Dow, S&P500, DAX30) to 17 (FTSE) , 23(CAC40) and 53 months
(Nikkei225) to recover. Pre - crash returns were negative as indexes toped at 2007.
C H A R T S
DJIA, 1987 crisis
52

The Dow Jones on the 1987 crash. The index crashed 39% in just 14 days.
DJIA, 1990 crisis
The Dow Jones in 1990 crisis. The Index crashed 22.49% in 82 days.
DJIA, 1998 crisis
53

The Dow Jones in 1998 Russian crisis. The Index crashed 21% in just 34 days.
DJIA, 2000 crisis
The Dow Jones in dotcomm crash. The Index lost 38.75% in 22 months/ 670 days
before it bottomed. .In the circle we spot the beginning of the crash.
54