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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