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Fundamentals, Bubbles, Trading Strategies: Are they the Causes of Black Monday?
Credit and Capital Markets – Kredit und Kapital, Vol. 22 (1989), Iss. 4 : pp. 470–486
3 Citations (CrossRef)
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D. Johannes Jüttner, Sydney and Tuscaloosa/Alabama
Cited By
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2020
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2017
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Abstract
Fundamentals, Bubbles, Trading Strategies: Are they the Causes of Black Monday?
This paper attempts to shed some light on the causes of the sharemarket boom of the mid 1980s and the subsequent crash in October 1987. Traditional finance theory offers little to explain the share price gyrations. Although fundamentals and to a lesser extend dividend growth, have played a role, we are left in the dark about the pronounced fluctuations of the required share market yield. The stock price movements resemble the inflation and the bursting of a bubbles. The bubble hypothesis, however, essentially entails irrational behaviour; this description contrasts with the assumptions made in the literature. According to the rational bubbles theory, participants in asset markets play a calculating game that allows them to retreat before the inevitable collapse of speculatively inflated prices. The swings of the last share market cycle were magnified by the wide-spread adoption of trading strategies which, ironically, were developed on the basis of the efficient market hypothesis. Portfolio insurance and other trading strategies aggravated the crisis and index arbitrage became ineffectual