Black Monday 1987: What is known about the causes

On 19 October 1987, known as Black Monday, the Dow Jones Industrial Average lost 22.6%. It closed 508 points lower, which according to the Federal Reserve was the largest one-day decline in US stock market history. An automated selling strategy called portfolio insurance played a part. How large that part was is still disputed today. Past performance is not a reliable indicator of future results. Data as of 2 November 2026.

Black Monday 1987 in figures

The figures depend on which market is measured. In the week to 16 October, the S&P 500 had already lost more than 9%.

The recovery came quickly. The Dow surpassed its pre-crash highs in less than two years.

How does portfolio insurance work?

When prices fall, the computer model calls for fewer shares in the portfolio, so shares are sold. The aim is to limit the loss.

Many insurers did not sell shares but index futures instead. This was cheaper, and some were not able to trade their clients' shares at all. Selling a future has a similar effect to selling part of the portfolio.

The strategy therefore sells in falling markets. When many market participants follow the same rule, their sales hit the market at the same time.

Selling spiral and flaws in market mechanics

The most widely held explanation is known as the cascade theory, as the Federal Reserve Bank of Boston summarised it in 1993. First, prices fall for good reasons. Then futures overreact because of portfolio insurance. They become cheaper than the shares they track. Traders then buy the cheap futures and sell the more expensive shares. This is called index arbitrage. In this way, the pressure moves into the stock market, and further selling follows.

The exchanges' mechanics added to this. According to the SEC report, as reproduced in the Carlson study, 95 S&P 500 stocks, together accounting for 30% of the index value, had not opened by 10 a.m. on the morning of 19 October. As a result, prices were out of date. Purchases and sales of shares were settled only after three days, while options and futures were settled after one day. The exchanges were also unable to halt large waves of selling. On 20 October, according to the Brady Report as reproduced in the Carlson study, specialists suspended trading in around 7% of stocks. How an order book ranks orders and what happens when trading is thin is explained in the article on the bid-ask spread.

What was the cause?

The Federal Reserve names a combination of factors: heavy international investment in US markets, the spread of portfolio insurance and the flaws in market processes mentioned above. There is one figure on the strategy's share. According to the Brady Report, cited in a Federal Reserve Board study, portfolio insurers accounted for around 40% of futures sales by traders without a market-maker role on 19 October. In addition, the ten largest sellers among traders without a market-maker role accounted for 50% of those traders' futures selling volume.

Assessments differ. We present the positions of the SEC, the CME committee and the CFTC Chairman as given in the Federal Reserve Board study (Carlson, FEDS 2007-13).

The Boston Fed considers the causes to be complex and not fully separable. In its view, the stock market itself also failed, for example in its trading mechanisms and out-of-date prices.

The Fed's response and new rules

On 20 October 1987, the Federal Reserve under Chairman Alan Greenspan said in a statement that it "affirmed today its readiness to serve as a source of liquidity". Liquidity here means enough money for banks and traders to continue operating. In the week of the crash, the ten largest New York banks nearly doubled their lending to securities firms.

After the crash, trading pauses known as circuit breakers were introduced on US exchanges. If the market falls sharply, trading is briefly halted. According to Federal Reserve History, the New York Stock Exchange's triggers are now set at declines in the S&P 500 of 7%, 13% and 20% (as of 2 November 2026).

The crash and option prices

A put is the right to sell an underlying at a fixed price, as the article on calls and puts shows. A 2005 study by the National Bureau of Economic Research (NBER) describes the following. Before the 1987 crash, the implied volatility of S&P 500 options was roughly flat across different strike prices. Implied means derived from option prices. Since the crash, puts with a strike price far below the market price have been expensive by comparison. This difference is called the skew. The study asks whether the skew can be explained by investors' ordinary preferences. The causes are a subject of research.

Risks and limits of interpretation

• Causes: They have not been conclusively settled. Every weighting comes from a body with its own perspective.
• Figures: The percentages refer to different indices and markets and are not directly comparable. Several figures (Brady Report, SEC) are given as reproduced in the Carlson study.
• Strategy: Portfolio insurance was a trading strategy without a guarantee. Losses were possible.
• Price jumps: How a jump without any trading in between can cause orders to be executed far below the level that was set is shown in the article on the Swiss franc shock of 2015.
• Example: The numerical example is highly simplified. This article is general in nature and does not constitute investment advice.

Conclusion

On Black Monday 1987, the Dow Jones lost 22.6%, the largest one-day decline in US stock market history. Portfolio insurance sold as prices fell. According to the Brady Report, portfolio insurers accounted for around 40% of futures sales by traders without a market-maker role. The SEC, the CME committee and the CFTC Chairman weighted this role differently. Flaws in market processes added to this. Since the crash, far out-of-the-money puts have traded at comparatively higher prices. The causes of this are a subject of research.