A Simple Model of Credit Contagion

We propose a simple and implementable model of credit contagion where we in-clude macro- and microstructural dependencies among the debtors within a creditportfolio. We show that, even for diversified portfolios, moderate microstructuraldependencies have already a significant impact on the tails of the loss distribu-tion. This impact increases dramatically for less diversified microstructures. Sincethe inclusion of microstructural dependencies acts on the tails, the choice of anappropriate risk measure for credit risk management is a delicate task.