Sovereign rating downgrade effect on equity markets

What is the effect on equity markets when sovereign debt loses its AAA rating?

The following chart shows the effect on five equity markets when the related sovereign debt lost its triple-A rating.


  1. The date of the downgrade is taken as the first date that the sovereign lost its AAA rating. For example, Moodys downgraded Japan in November 1998 but Standard & Poor’s kept Japan at its highest rating of triple-A until February 2001. In this study the first date (November 1998) is used.
  2. The time period analysed is from two months before the downgrade to 12 months after. The downgrade is announced in week 9 – as indicated by the dotted line in the chart.
  3. The five indices are indexed to 100 at the end of week 9.


  1. In the short term (two months) following the downgrade all the equity markets except Japan performed strongly.
  2. After the first two months, Japan then rebounded strongly, although the French market then suffered a period of weakness.
  3. 12 months after the downgrade all equity markets were higher, with an average increase of 17.7% from the time of the downgrade.

The data is summarised in the following table-

Date of losing AAA Country Index Index change 12 mnths after downgrade(%)
Apr 1993 Canada S&P/TSX 18.5
Nov 1998 Japan Nikkei 225 23.5
Apr 2010 Spain IBEX 17.0
Aug 2011 US S&P 500 18.0
Jan 2012 France CAC40 11.6
Social Share Toolbar

Country equity capitalisations 1900-2012

Credit Suisse have just released their annual The Credit Suisse Global Investment Returns Sourcebook 2013, written by Elroy Dimson, Paul Marsh, and Mike Staunton.

An interesting chart (below) in the report shows the proportional equity capitalisations of all major markets since 1900.

According to the report,

In 1900, the UK was the world’s largest equity market, followed by the USA, then France and Germany. Japan was then just a tiny emerging market. Early in the 20th century, the UK was overtaken by the USA, which remained the dominant market throughout, save for a brief 3-year period in the late 1980s, when Japan became the world’s largest equity market. At its peak, Japan accounted for 45% of the total market capitalization of our 22 countries. Then the Japanese bubble burst and, by the end of 2012, Japan’s proportion had fallen to just 8%, while the USA still accounted for 51%.


Social Share Toolbar