This paper was written in the course "Investment Management". It outlines the history of stock market crashes that occurred throughout time. Starting with the first big crash, the tulip mania, in the years of 1636 and 1637. Following, further big crashes up to recent days are presented and the reasons and outcomes of these are explained.
A stock market crash can be defined as an extreme price collapse on the stock market. Usually this process takes a few days to a few weeks. During this period mostly panic sales, which generate a large excess supply and thus lead to drastically falling prices dominate the scene.
Table of Contents
1. Introduction
2. The first big crash
3. The Great Depression
4. Modern Crashes
5. The Crisis of 2007/2008
6. Conclusion
Objectives and Topics
This paper aims to provide a comprehensive historical overview of major stock market crashes, analyzing their specific occurrences and the underlying economic mechanisms that lead to such extreme price collapses.
- Evolution of historical market bubbles, starting with the 17th-century tulip mania.
- Economic impact and triggers of the 1929 Great Depression and the 1987 market crash.
- Analysis of the 2000s dot-com bubble and its transition into the new economy.
- Mechanisms behind the 2007/2008 global financial crisis and the role of mortgage-backed securities.
- Psychological and structural factors contributing to market volatility and human speculative behavior.
Excerpt from the book
3. The Great Depression
The first, and one of the most famous, crashes in the 20th century, happened in 1929. The US economy boomed during the time of the so called “golden twenties”, stock prices rose and rose. The Shiller P / E of the S & P 500 Index, a 10-year average of the price-earnings ratio named after Nobel laureate Robert Shiller, peaked at 32.5. The long-term average is only 16.8. Shares were then almost as expensive as today (current Shiller P / E: 31.98). Only for the dotcom bubble, the ratio was even higher; at the end of 1999, it equaled, for the 500 largest US stocks on average 44.2. In 1929, many investors dreamed that they would be able to live permanently from the price gains and not have to work any longer. For this they also took out loans and bought shares on pump. After the 1929 crash many investors were ruined, many even committed suicide. Incidentally, the crash in the USA was already interpreted in the summer by falling prices in Europe. Sales of durable consumer goods such as furniture also stagnated, but the US economy had greatly expanded production. Today, the crash is considered the trigger of the so called Great Depression.
After 1929 people were a lot more careful and partly learned their lesson. It took quite a long time until the next big crash occurred in 1987, the first stock market crash after the Second World War. The Dow Jones fell 22.6 percent, or 508 points, in one day; this was the largest percentage decline within a day in its history. The fall quickly spread to all major international stock exchanges. By the end of October, stock prices fell 41.8 percent in Australia, 22.5 percent in Canada, 45.8 percent in Hong Kong and 26.4 percent in the UK. The crash was preceded by no drastic events. To date, it is disputed which factors led to this stock market crash. The Dow Jones had almost doubled since 1985; In August 1987, however, there were increasing signs of an end to the bull market. Thus, the cabinet of president Ronald Reagan failed to get the inflation and the excessive trade deficit, equaling 152.1 billion US dollar, in order.
Chapter Summary
1. Introduction: Defines a stock market crash as a period of rapid, panic-driven price decline and sets the scope for examining key historical market failures.
2. The first big crash: Details the 1637 Dutch tulip bulb speculation, which serves as an early example of an exotic asset bubble collapsing.
3. The Great Depression: Examines the 1929 market crash and the subsequent 1987 Black Monday, highlighting the shift from excessive speculation to international market contagion.
4. Modern Crashes: Reviews the March 2000 dot-com bubble, focusing on the speculative nature of the "new economy" and the loss of assets for retail investors.
5. The Crisis of 2007/2008: Discusses the systemic failure triggered by the US housing market, subprime mortgages, and the eventual global banking crisis.
6. Conclusion: Reflects on the cyclical nature of financial markets and the persistent role of human psychology and risk-taking in driving market volatility.
Keywords
Stock market crash, speculation, financial crisis, Great Depression, dot-com bubble, subprime mortgages, liquidity, investment, market volatility, economic recession, Lehman Brothers, Tulip Mania, asset bubble, banking system, trade deficit.
Frequently Asked Questions
What is the core subject of this paper?
The paper explores the history and recurring nature of stock market crashes, analyzing how speculative bubbles develop and eventually burst in modern history.
Which specific time periods or events are identified as central themes?
The study focuses on the 1637 Tulip Mania, the 1929 Great Depression, the 1987 crash, the 2000 dot-com bubble, and the 2007/2008 global financial crisis.
What is the primary objective of the author?
The primary objective is to outline the largest stock market crashes and explain the underlying economic and structural reasons that led to these events.
Which scientific approach does the author use?
The author uses a historical and descriptive analysis approach, synthesizing existing literature to trace the chronological development of financial market failures.
What topics are covered in the main body of the text?
The main body covers the transition from speculative booms to crashes, the impact of computerization on trading, and the role of monetary policy and debt in global financial instability.
Which keywords best characterize this publication?
Key terms include stock market crash, financial crisis, speculation, bubbles, liquidity, and economic recession.
Why was the Dutch tulip market considered a significant early crash?
It represents the first documented case of a severe exchange crash driven by extreme speculation in a non-financial commodity, demonstrating that market bubbles are not a modern phenomenon.
How did automated trading influence the market crash of 1987?
The increasing computerization of trading and the use of similar dynamic hedging systems by banks created a cascade effect where simultaneous selling orders amplified price declines.
What role did rating agencies play in the 2008 crisis?
Rating agencies promoted the profitable sale of mortgage-backed securities by providing extremely positive assessments of poorly backed, high-risk loans.
What is the author's ultimate conclusion regarding market cycles?
The author concludes that market volatility is an inherent part of the financial world, driven by human nature's desire for profit and the willingness to take risks.
- Citation du texte
- Peter Rössel (Auteur), 2018, The history of stock market crashes, Munich, GRIN Verlag, https://www.grin.com/document/428733
