Why we may be doomed to repeat Black Monday 1987

Wednesday, October 17, 2012
By Paul Martin

Another stock crash like 1987’s is inevitable
Commentary: Investors are beholden to big traders’ whims

By Mark Hulbert
Oct. 17, 2012

CHAPEL HILL, N.C. (MarketWatch) — Prepare yourself for another stock market crash as big as the free fall in October 1987.

That’s a daunting prospect indeed, since at current levels such a decline would mean the Dow Jones Industrial Average DJIA -0.22% would plunge by more than 3,000 points in a single trading session.

And we’re kidding ourselves if we think that market regulatory reforms such as circuit breakers will be able to prevent it.

These sobering truths are what emerge from a fascinating line of recent academic research into the frequency of market crashes. Recognizing them is perhaps the best way for us to respect this week’s 25th anniversary of the Oct. 19, 1987 Crash, when the Dow plunged 22.6%.

This research traces to “A Theory of Large Fluctuations in Stock Market Activity,” a study conducted a decade ago by Xavier Gabaix, a finance professor at New York University, and three scientists at Boston University’s Center for Polymer Studies: H. Eugene Stanley; Parameswaran Gopikrishnan, and Vasiliki Plerou. ( Click here for a copy of the study. )

In numerous follow-up studies, Professor Gabaix said in a telephone interview earlier this week, the original findings have only been strengthened.

No way to stop losses

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