This study investigates the aggregate stock market impact of sovereign rating changes. Consistent with evidence pertaining to company credit rating changes, we report that rating downgrades have a negative wealth impact on market returns. Moreover, we find that a downgrade impacts negatively on both the domestic stock market and the dollar value of the country's currency. Interestingly, of the four credit rating agencies examined, only Standard & Poors and Fitch rating downgrades result in significant market falls. Finally, we can find no evidence that emerging markets are particularly sensitive to rating changes or that markets react more severely to multiple rating changes. © 2002 Elsevier B.V. All rights reserved.