Abstract

On Friday, August 5, 2011 Standard and Poor’s rating agency downgraded long-term U.S. Treasury debt from AAA to AA+ for the first time in history. In this study, the impact of this downgrade on world stock markets is examined. We analyze the immediate effect of this downgrade on leading stock indices of 31 nations owning U.S. Treasury debt. We find that the downgrade had a marked effect on the first trading day following the announcement. It truly was a macroeconomic event. We further examine whether return differentials were partially explained by the level of U.S. debt that each country possessed (both on an absolute and relative basis). We find no evidence of this relationship, which suggests equity markets in countries owning considerable Treasury securities suffered no more or less than equity markets in countries with less U.S. Treasury debt.

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