1. Introduction

On October 27, 1997, the Dow Jones Industrial Average (DJIA) fell a breathtaking 554 points, or 7.2%, to close at 7161. This massive collapse represented the largest absolute point decline in the history of the index and the tenth-largest percent loss since 1915. That evening, the financial news featured a parade of experts, each prepared to explain exactly what had happened and why. Despite the confusion, they all seemed to have two things in common: their failure to predict the drawdown before it happened, and their prediction that the next day would be worse. They were dead wrong. The next day the market resumed its decline before rallying sharply to close up 337 points (4.7%) on then-record volumes of over a billion shares. ...

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