It is a known fact that default rates seem to exhibit cyclic behavior. Most probability of default models use one-year averages of default rates to calibrate the models. The one-year averages should be observed long enough to take into account the effects of a full business cycle. But what if historic data does not do back far enough to explain the effects of a full business cycle?
I guess one could link macro economic factors to default rates and extrapolate. Then the value should be somewhat cycle neutral. But from what data could there be extrapolated? Also S&P and Moody's default rates go back to the 1980's but are they representative in all case to extrapolate from? And I do wonder, how do financial institutions make 'artificial' data to represent full business cycles? Thanks for any suggestion or help.