FRM Part II · FRM Exam Part II · Country Risk: Determinants, Measures, and Implications

An analyst notes that sovereign rating agencies' actions often lag market indicators such as credit default swap spreads and bond yields. Which feature of rating agency methodology best explains this lag?

Ratings lag markets because agencies aim for stable, through-the-cycle views of default risk and change ratings only when deterioration or improvement seems persistent, while CDS spreads and bond yields reprice continuously as new information arrives.

1. ARatings are designed to be stable through-the-cycle assessments and change only when agencies are confident the shift is persistent, whereas market prices update continuouslyCorrect
2. BRatings are computed daily from CDS spreads and therefore always match them
3. CAgencies rate only the currency of denomination, ignoring fiscal data
4. DRatings are set by governments and revised only after elections