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A Simple Model of Credit ContagionMarkus LeippoldUniversity of Zurich - Department of Banking and Finance; Swiss Finance Institute; University of Zurich - Faculty of Economics, Business Administration and Information Technology Daniel EgloffQuantAlea GmbH Paolo VaniniZurich Cantonal Bank; University of Basel EFA 2004 Maastricht Meetings Abstract: We propose a simple and implementable model of credit contagion where we include macro- and microstructural dependencies among the debtors within a credit portfolio. We show that, even for diversified portfolios, moderate microstructural dependencies already have a significant impact on the tails of the loss distribution. This impact increases dramatically for less diversified microstructures. Since the inclusion of microstructural dependencies acts on the tails, the choice of an appropriate risk measure for credit risk management is a delicate task.
Number of Pages in PDF File: 55 Keywords: Credit Portfolio Risk Management, Contagion, Macroeconomic Deependencies, Microstructural Dependencies, Value-at-Risk, Expected Shortfall JEL Classification: C19, C69, G18, G21 working papers seriesDate posted: January 5, 2004 ; Last revised: December 18, 2008Suggested CitationContact Information
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