Portfolio insurance collapsed after 1987 partly because it became socially tainted

Evidence

That mattered less than it might have, because after October 1987 the market for the type of portfolio insurance sold by LOR, its licensees, and its competitors dwindled rapidly. In part that was because the costs of portfolio insurance in situations of high volatility (forgone gains and risks of being “stopped out”) became evident, but it may also have been because the managers of “respectable” institutions such as pension funds wished to avoid overt pursuit of a strategy that was “tainted” by its association with the crash. — Donald MacKenzie, An Engine, Not a Camera, 889

Categorization

• XREF: Reputational/social factors — the taint of the crash — driving financial practice echoes the institutionalist and valuation literatures. Relates to how legitimacy shapes what financial instruments survive. — connects to: Rumors during the 1987 crash exaggerated portfolio insurance trade size three to fourfold — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 874; Portfolio insurance designed to limit losses can amplify market volatility. — Shapiro, Susan P., The Social Control of Impersonal Trust, 144; The 1987 crash exposed how fragile the options clearing system was to extreme prices. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 164 (+1 more)

Broader Connections

• Portfolio insurance designed to limit losses can amplify market volatility. #expands (0.85) — Shapiro, Susan P., The Social Control of Impersonal Trust, 144
• The 1987 crash exposed how fragile the options clearing system was to extreme prices. #corroborates (0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 164