Are Sovereign Ratings by CRAs Consistent?

Abstract

This study is an attempt to compare and contrast the credit ratings granted by prominent agencies, the so-called Big Three namely S&P, Moody's and Fitch, that dominate the market. The sovereign ratings are proven to motivate the CDS figures of countries empirically, and low ratings are known to increase the interest paid to liabilities by these countries. We employ the historical data over 1994-2014 on the sovereign ratings of 117 countries to test for whether the ratings assigned by CRAs are significantly different or not, with the help of paired t and ANOVA tests. Hypothesis test results reveal that such differences are significant for many countries and country groups, suggesting that the ratings by CRAs are not consistent with each other. This is true for BRIC, OECD, and emerging market countries. Extra ANOVA tests that we conducted support our findings.