Rating agencies' credit signals: An analysis of sovereign watch and outlook

We analyse sovereign watch and outlook signals from Moody's, S&P and Fitch. Prior literature shows strong market reactions to these signals, which arguably contain more new information than rating changes. We show that the agencies' actions imply different policies: S&P has more emphasis on short-term accuracy, while Moody's actions are consistent with greater stability. We find evidence of momentum in negative (not positive) outlook signals, but no watch momentum. We also examine the lead–lag relationships, finding that S&P (Fitch) demonstrates the least (most) links with other agencies' actions. Moody's tends to be the first mover for positive outlook and watch signals.