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Credit Portfolio Modelling, Marginal Risk Contributions, and Granularity Adjustment

by Hans Rau-Bredow of the Universität Würzburg

June 14, 2002

Abstract: This paper first provides a simple but very general framework for credit portfolio modelling which is based on the distinction between systematic and unsystematic risk. Un-systematic or borrower-specific risk vanishes through diversification in a very large, in-finitely fine-grained portfolio. The framework contains typical models like CreditRisk+ and CreditMetrics as special cases. An analysis of marginal risk contributions is then done which also includes a theoretical formula for the granularity adjustment in a "lumpy" credit portfolio.

JEL Classification: D81, G21, G28.

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