The stock market crash of October 1987 led to a boom in conferences, commissions, and studies of the stock market. In almost each case, the participants would try to understand the events of October 1987 by a detailed analysis or description of events during the particular days of high volatility. Of course, to us economists there was nothing qualitatively unusual about October 19, 1987; the stock market moved, and we have no model that succeeds in explaining the magnitude or sources of daily stock market volatility for that day or any other day. When asked by the National Bureau of Economic Research to organize yet another conference on this subject, I decided that it was time to put these events in a historical perspective and try to understand them in the context of longer time periods and broader models. The papers collected in this symposium issue admirably succeed in broadening...

Over the past decade, Sanford Grossman's contributions to the economics of information have significantly altered the way economists think about rational expectations. Here his articles are collected in one place, providing a uniform framework for understanding how prices convey information in securities markets. Grossman elaborates a new model of economic equilibrium that casts a dual role for prices both as constraints that affect the immediate costs or benefits of acts and as conveyers of information about the probable future costs and benefits of those acts. He points to the Wall Street panic of October 1987 as an example of the informational role of prices where volatility actually represented sophisticated trading strategies by relatively uninformed individuals.

We analyze a model of optimal consumption and portfolio selection in which consumption services are generated by holding a durable good. The durable good is illiquid in that a transaction cost must be paid when the good is sold. It is shown that optimal consumption is not a smooth function of wealth; it is optimal for the consumer to wait until a large change in wealth occurs before adjusting his consumption. As a consequence, the consumption based capital asset pricing model fails to hold. Nevertheless, it is shown that the standard, one factor, market portfolio based capital asset pricing model does hold in this environment. It is shown that the optimal durable level is characterized by three numbers (not random variables), say x, y, and z (where x