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. (C) 2011 Elsevier Inc. All rights reserved.