Abstract
This chapter focuses on dependence as an issue of special interest in credit risk. It uses simple example to illustrate the importance and the impact of dependence when it comes to assessing a portfolio. Then it compares the notions of correlation and dependence and capturing the dependence structure. It also provides a brief review on the definition and structure of copulas. In subsequent sections it investigates the use of copulas in modeling rating transitions and examines how correlated and dependent migrations can be modeled in a Markov chain framework. Assessing credit risk on a portfolio level requires the combination of two components: information on the risk of all portfolio items, and information on the level and structure of interaction between them.
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