Credit Portfolio Modelling, Marginal Risk Contributions, and Granularity Adjustment

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