Credit risk contagion

Current approaches to credit risk modelling typically explain correlation between companies by their exposure to common macroeconomic and financial risk factors. However, this explanation must be incomplete as common sense tells us that a credit event at one company affects the solvency of related companies directly. This effect is known intuitively by risk managers and regulators, which is why they track the interconnectedness of the companies they oversee. In this article, we suggest a way of

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