The Complexity of Price Discovery in an Efficient Market: The Stock Market Reaction to the Challenger Crash

The Challenger crash was a highly visible event whose underlying cause was not publicly revealed until much later. Methodologically, the event has appealing features. It was an exogenous occurrence. There was no leakage that induced run-up or run-down in the pre-event period. Our basic analysis provides a test of market efficiency. How quickly and accurately did the stock market process the implications of the space shuttle crash? As an extension, we also attempt to discern exactly how the price discovery unfolded on the day of the crash. Who provided the information that was imbedded in market prices? How valuable was the information? Indeed, we can gauge the speed of the stock market reaction to the crash not only by the time that the guilty firm was discovered, but also by the time in which the innocents were released.