Fitch, moody's and S&P's sovereign ratings and EMBI global spreads: Lessons from 1993-2007

Abstract

This paper analyzes the interactions between JP Morgan EMBIG spreads and Fitch, Moody's and S&P's sovereign ratings for December 1993-February 2007 and shows that the alleged procyclicality of ratings is not supported by the data. Focusing on the specific relationship between the market and each agency, I obtain the following results. First, an unbalanced panel data estimation demonstrates that, beyond the obvious negative relationship between spreads and ratings, Moody's disagrees with the market more often than Fitch and S&P's. Second, although Moody's ratings adjust less often to stick to markets spreads than S&P's and Fitch, the ratings of the three agencies are particularly stable. Third, there is an asymmetric adjustment of ratings: the three agencies are more prone to downgrade following excessively high spreads and spread increases than to upgrade following excessively low spreads and spread decreases. Fourth, reactions of spreads to rating changes reveal that S&P's downgrades and Moody's upgrades have the most significant impact on spread movements. © EuroJournals Publishing, Inc. 2009.