Risk register · entry
Q4 · Where models dieBlack Monday
Portfolio insurance fed on itself until the market fell a fifth in a day.
The world stops matching the model. Regime change and leverage turn a small error fatal.
Why this quadrant
Portfolio insurance was sold as a hedge that would sell into a falling market to limit losses. It worked as described. The problem was that everyone running it sold at the same moment, so the strategy supplied the crash it was meant to protect against. The model had assumed the seller was too small to move the price.
The record
- Dow Jones fell 508.32 points, 22.6 percent, closing at 1,738.74 down from 2,246.74 on October 19, 1987certain
- S&P 500 fell 20.47 percent on October 19, 1987certain
- Worldwide equity losses estimated at 1.71 trillion dollarslikely
- UK FTSE 100 fell 23 percent over two dayscertain
- Hong Kong market fell 45.8 percentcertain
- Federal Reserve injected 17 billion dollars into the banking system on October 20, 1987, over 25 percent of bank reserve balances and about 7 percent of the monetary basecertain
- 195 of 2,257 NYSE-listed stocks experienced trading delays or halts on October 19; 95 of the S&P 500 and 11 of the 30 Dow stocks opened latecertain
- S&P 500 did not regain its pre-crash high until July 26, 1989certain
- An estimated 60 to 90 billion dollars in institutional assets were run through portfolio insurance strategies by October 1987likely
- Portfolio insurance developed by Hayne Leland and Mark Rubinstein, commercialized via Leland O'Brien Rubinstein Associates (LOR), built on the Black-Scholes modelcertain
- Presidential Task Force on Market Mechanisms (Brady Commission) reported in January 1988likely
Sources
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