To What Extent Did Stock Index Futures Contribute to the October 1987 Stock Market Crash?

The authors examine the extent to which futures contributed to the stock market crash. Correcting for nonsynchronous trading, they find that this explained little of the behavior of the markets, leaving breakdown as the most probable explanation. The authors investigate breakdown by analyzing the pricing relationship on the 19th and 20th of October 1987. They find that the arbitrage link broke on the 19th due to liquidity problems in the stock market. This drove traders to the futures market, alleviating the liquidity problem such that the link was restored on the 20th. The implication is that the problem lay with the stock market. Copyright 1993 by Royal Economic Society.