Portfolio insurance was the trading mechanism widely blamed for intensifying computerized selling during the 1987 U.S. stock-market crash. It was designed to limit losses by automatically selling stock-index futures as markets declined.
The strategy used mathematical rules to adjust exposure rather than relying on a manager’s judgment. When prices fell, portfolios could sell more futures, which could place additional downward pressure on markets. On 19 October 1987, this feedback effect operated alongside heavy investor selling and strained market infrastructure.
Portfolio insurance did not cause the crash by itself. Other factors included a long market rise, concerns about interest rates and trade imbalances, differences between cash and futures markets, and a lack of experience with computerized trading at that scale. Researchers and regulators have continued to debate the relative importance of each factor.
The episode influenced later market safeguards. U.S. exchanges developed circuit breakers and coordinated procedures intended to slow trading during extreme volatility. Portfolio insurance should not be confused with government deposit insurance, which protects eligible bank deposits rather than stock portfolios.