Sovereign Ratings and Their Asymmetric Response to Fundamentals

Changes in sovereign ratings are strongly asymmetric, as downgrades tend to be deeper and faster than upgrades. In other words, once a country loses its initial status it takes a long time to recover it. Using S&P data, we characterise “rating cycles” in terms of their duration and amplitude. We then study whether the agency reaction to new economic and financial domestic information also differs during upgrade and downgrade phases. Our results indicate that favourable fundamentals could be helpful for smoothing and slowing down the path of downgrades, whereas favourable fundamentals do not seem to accelerate the rating recovery