A Simple Model of Credit Contagion

55 Pages Posted: 5 Jan 2004 Last revised: 18 Dec 2008

See all articles by Markus Leippold

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Daniel Egloff

QuantAlea GmbH

Paolo Vanini

University of Basel

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.

Keywords: Credit Portfolio Risk Management, Contagion, Macroeconomic Deependencies, Microstructural Dependencies, Value-at-Risk, Expected Shortfall

JEL Classification: C19, C69, G18, G21

Suggested Citation

Leippold, Markus and Egloff, Daniel and Vanini, Paolo, A Simple Model of Credit Contagion. EFA 2004 Maastricht Meetings. Available at SSRN: https://ssrn.com/abstract=483982 or http://dx.doi.org/10.2139/ssrn.483982

Markus Leippold

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Daniel Egloff

QuantAlea GmbH ( email )

Wasserfuristrasse 42
Wiesendangen, 8542
Switzerland
+41 44 520 0117 (Phone)

Paolo Vanini (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

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