From: Alejandro Agafonow <alejandro_agafonow@yahoo.es>

Date: Tue Nov 11 2008 - 09:55:49 EST

Date: Tue Nov 11 2008 - 09:55:49 EST

Paul C.: “Do they assume defaults follow a negative exponential distribution?”
Unfortunately, I can only offer an indirect insight into this question.
If defaults would follow a negative exponential distribution, this means a continuous interval among each default, therefore a very predictable event; at least once the first default occurs (homogeneous Poisson process).
Then, from my studies of the “Rawlsian maximin criterion”, I have seen that market oriented neoclassical economists use to criticize it because the assumption of high risk aversion from the representative agent.
So, their bias toward a low risk aversion makes me suspect that the models behind “credit default swaps” maybe do not assume a negative exponential distribution. Is there another alternative? Maybe geometric distribution?
But we are talking of “unreliable loans” (highly risky), so maybe could be a simplifying assumption in these models that move these mathematicians and physicists to assume exponential distribution. This assumption must imply something concerning the operation of the market for unreliable loans that allegedly would reduce their risk.
Regards,A. Agafonow
________________________________
De: Paul Cockshott <wpc@dcs.gla.ac.uk>
Para: Outline on Political Economy mailing list <ope@lists.csuchico.edu>
Enviado: martes, 11 de noviembre, 2008 12:10:57
Asunto: RE: Re: [OPE] The micro dimension of the Financial Crisis.
Paul C.: "That sounds too much like neo-classical economics to be plausible for the maths used to price derivatives and bundles of debt. I had assumed that what they did was based much more soundly on classical probability theory with little reference to factors of production, returns to scale etc."
Alejandro A:
Essays in Positive Economics(1953) of Milton Friedman is basically a development of probability theory within the framework of Neoclassical Economics. The development of Neoclassical Economics during the last 60 years has followed this route. The mixture of axiomatic economics and free market ideology sounds too much as Friedman.
Paul C again:
Yes but the question I asked was what form of PDF they assume. Do they assume defaults follow
a negative exponential distribution?

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Received on Tue Nov 11 09:58:19 2008

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