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

Which statement about sovereign credit ratings from agencies such as Moody's and S&P is most accurate?

Sovereign ratings tend to lag the market. Agencies revise ratings infrequently and with judgment, so bond spreads and credit default swap prices usually move before rating changes. Default spreads for a given rating also vary over time rather than staying constant.

  1. ARatings are fully forward-looking and adjust immediately to market changes in sovereign bond spreads
  2. BRatings tend to lag market-implied default risk, so sovereign bond spreads and CDS often move before rating changesCorrect
  3. CRatings are based solely on quantitative models with no analyst judgment
  4. DA sovereign with the same rating always has an identical default spread through time

Explanation

Agency ratings are sticky and updated infrequently, so market indicators like bond spreads and sovereign CDS typically react earlier. Ratings also involve analyst judgment, and spreads for a given rating vary over time, so the other statements are false.

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