Basel II implementation requires the estimations of probability of default (PD) and migration rate under hypothetical or historically observed stress scenarios. Typically, financial institutions first forecast selected macroeconomic variables under these stress scenarios and then estimate the...

We investigate whether the spread of corporate debt contacts can be explained by their ultimate recovery rates. Using the actual realized recovery rates of defaulted debt instruments issued in the U.S. from 1962 to 2007, we find that recovery rate is reflected in the spread at issuance, and that...