A Simple Model of Credit Contagion
by Daniel Egloff of Zürcher Kantonalbank,
September 22, 2005
Abstract: We propose a simple and easily implementable model of credit contagion in which we include macro- and microstructural interdependencies among the debtors within a credit portfolio. We show that even for diversified portfolios, moderate microstructural interdependencies have a significant impact on the tails of the loss distribution. This impact increases dramatically for less diversified microstructures. Since the inclusion of microstructural interdependencies 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 and Microstructural Interdependence, Value-at-Risk, Expected Shortfall.
Published in: Journal of Banking & Finance, Vol. 31, No. 8, (August 2007), pp. 2475-2492.
Related reading: Effects of Economic Interactions on Credit Risk