Estimating credit contagion in a standard factor model

Among the most important positions on the asset side of a financial institution's balance sheet are credit-risky securities, and a major task for risk managers and analytics is the appropriate modelling and forecasting of the inherent credit risk. Typically, banks and other institutions apply credit risk models for this purpose, either purchased from a vendor such as CreditMetrics or CreditRisk+ or internally developed (see, for example, Finger, 1998, Credit Suisse First Boston, 1997, or Bluhm