The many theories and causes of the crash

With macroeconomic events many experts and economists have their own reasons and opinion of why such events happen and this week I am going to discuss the various causes and their counter arguments. 

Program trading by institutional investing companies was a cause of the crash.
However other markets such as Australia and Hong Kong, where program trading was not widespread, also crashed. These may have been in reaction to the program trading in the U.S. but economist Richard Roll says that the crash began in Hong Kong and struck the U.S. after other markets had already descended by considerable amounts.

A senior fellow with the National Centre for Policy Analysis of Dallas and the Brady Commission argued that the early blames for the crash was to do with the failure between the stock markets and derivatives markets to activate in sync with each other. This can happen as the options and futures rely heavily on the changes and volatilities in the stock prices market.

Illiquidity played its part during the crash as large amounts of sell orders were trying to be processed it was difficult to find buyers and this led to termination in trading for many listed stocks. This heightened the price drop as investors had overestimated the amount of liquidity. It does not explain why so many people tried to sell so much stock at the same time. This could be to do with human nature and panic settling in the market

Analysts concur that the stock prices were overvalued around the time of the crash with Price/Earning and Price/Dividend ratios being too high. Though this does not explain the trigger of the crash as they were also historically high in the period 1960-1972 and no crash occurred then.

A reason for investors leaving the stock market could of been to do with the growing attraction of the bond market as long term bond yields had started the year at 7.6% and had grown to 10% by the summer. This offered a more stable, lucrative alternative to the stock markets for investors.

Another possible reason was the announcement on October 14^th of the large U.S. trade deficit where investors may have predicted a fall in the dollar on foreign exchange markets. However this does not explain crashes in other countries.

With these arguments still in contention for debate, program trading took a lot of the blame in the public eye and next week I will discuss the aftermath and the Government intervention that followed the crash.