Using the statistical dating technique that we introduced previously in other analysis, we see that stock market crash of October 1987 really began as a positive disruptive event in January 1987. Besides the dramatic effect on investor psychology, the stock market crash of 1929 contributed to the creation of a variety of new laws, organizations and programs designed to improve the country’s infrastructure, further social welfare and prevent corporate fraud and abuses.
Globally, the 2014 slower economic growth in Europe and China took capacity planners and market makers by surprise; the developed world’s drive to decrease carbon emissions is finally having an impact on the oil market through greater energy efficiency.
Misreading of deflation effects is also one of the major reasons, as the depression lasted longer than any before it. It is safely assumed that in deflationary conditions the interest rates will come down drastically and it will encourage people to borrow and invest money again in the economy.
Specification 1 shows no relationship between returns and average expectations, because it shows the mixed results of a positive relationship between changes in the DJIA and the average level of expectations in the pre-crash period and the temporary increase in expectations after the crash.
Government bonds, as should be expected, were in a bull market until that point (corporate bonds, however, were in a bear market.) The increase in interest rates, and consequently increase in government bond yields, seriously hurt the balance sheet of banks, who owned a lot of government bonds.