Rating spillover effects on the stock markets

•This paper tests the impact of sovereign rating change on the stock market returns.•We undertake the analysis by considering countries in pairs.•We find spillover effect for rating changes of other countries on a single market.•We find a pre-announcement impact for upgrade and post announcement for downgrades.•We find no spillover effect for rating change of a single country on other countries.

This paper studies the impact of a sovereign rating change of a particular country on the stock markets of those countries to which it is closely related in individual pairs. We equally test the impact of other countries rating changes on the stock market of one particular country using a sample of ten countries for the period January 1989 to December 2010. While, there is a pre-announcement case for upgrades and post announcement case for downgrades, we find that collectively as a group the countries may potentially have a spillover effect, while on an individual basis, it does not appear to be the case.