Abstract
What participant in the equity markets could ever forget the month of October, 1987? It was a wild, turbulent time, and Monday, October 19, was a black day: the Dow Jones Average of 30 industrial stocks dropped 508 points on that day to close down 22.61%. But the dramatic plunge on the 19th is not what captures our attention in this piece. Rather, it is the sharp market swings of over a quarter of a century ago, and the fact that, to the current day, bouts of sharply accentuated short-period volatility continue to characterize our equity market. How, we ask, might such turbulence be dealt with?
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Notes
- 1.
Following black Monday in 1987, the market reversed direction on October 20 and 21, with the Dow regaining 289 points to end the day 16.03% higher than its October 19 close. October 26 saw another big drop (156.83 points or 8.04%), after which the DOW continued to climb back for the remainder of the month.
- 2.
- 3.
See Division of Market Regulation (1988).
- 4.
Eventually, many firms did not actually carry the programs out, as discussed by Netter and Mitchell (1989).
- 5.
For further discussion, see Alan and Schwartz (2013).
- 6.
In practice, designated sponsors have supplied liquidity for the less liquid small-cap and mid-cap stocks, not for the blue chips.
References
Alan, N. S., Mask, J. S., & Schwartz, R. A. (2015). A liquidity program to stabilize equity markets. Journal of Portfolio Management, 41(2), 113–125.
Alan, N. S., & Schwartz, R. A. (2013). Price discovery: The economic function of a stock exchange. Journal of Portfolio Management, 40(1), 124–132.
Division of Market Regulation, U.S. Securities and Exchange Commission. (1988, February). Issuer repurchase activity. In The October 1987 market break, Chap. 6, Washington, DC.
Graham, B., & Dodd, D. (1934). Security analysis (3rd ed., p. 515). New York: McGraw Hill.
Netter, J. M., & Mitchell, M. L. (1989). Stock-repurchase announcements and insider transactions after the October 1987 stock market crash. Financial Management, 18, 84–96.
Schwartz, R. A. (1988). A proposal to stabilize stock prices. Journal of Portfolio Management, 15, 4–11.
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Reprinted with permission from Invited Editorial: Combatting Turbulence in the Equity Market: Get the Listed Companies on Board, Alan, N., Mahoney, T., and Schwartz, R., the Journal of Portfolio Management, Summer 2015.41 (4) 8-11.
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Alan, N.S., Mahoney, T., Schwartz, R.A. (2021). Invited Editorial: Combatting Turbulence in the Equity Market—Get the Listed Companies on Board. In: Schwartz, R.A., Byrne, J.A., Stempel, E. (eds) Equity Trading Round-Up. Zicklin School of Business Financial Markets Series. Springer, Cham. https://doi.org/10.1007/978-3-030-51015-2_10
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