alexa Have We Learned from Previous Stock Meltdowns?
ISSN: 2375-4389

Journal of Global Economics
Open Access

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Research Article

Have We Learned from Previous Stock Meltdowns?

Michel A* and Shaked I

Questrom School of Business, 595 Commonwealth Avenue, Boston, MA 02215, USA

*Corresponding Author:
Michel A, Professor
Department of Finance
Boston University Questrom School of Business
Boston University, Boston, USA
Tel: 617-353-4167
E mail:
[email protected]

Received April 22, 2014; Accepted June 05, 2015; Published June 19, 2015

Citation: Michel A, Shaked I (2015) Have We Learned from Previous Stock Meltdowns? J Glob Econ 3:151. doi:10.4172/2375-4389.1000151

Copyright: © 2015 Michel A, et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

 

Abstract

We have witnessed three major stock market meltdowns over the past three decades. This paper assesses the market shocks of 1987, 1997 and 2008. In particular, we review the history of modern finance and assess whether the role of quantitative finance has developed to reduce the likelihood of future meltdowns. We see that the role of models based on historical price movement often ignore the possibility of fat tails, that risk free arbitrage may exist in normal, but not tumultuous markets and that asset returns and correlations result in extreme values more frequently than predicted by the standard bell curve. Moreover, the desire for outsized returns has driven many money managers to leverage their returns beyond prudent levels, dramatically increasing portfolio risk. In addition, many in Wall Street sell and create new derivative products that are often sold without the necessary due diligence and properly conducted stress tests. The same quantitative courses are taught and similar derivative products are sold as during the three previous meltdowns. Unfortunately, the SEC and academia have taken little permanent action to reduce the odds of further stock meltdowns.

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