Re: Bootstrapping default probabilities

Posted by leibniz777 on
URL: http://quantlib.414.s1.nabble.com/Bootstrapping-default-probabilities-tp8376p8385.html

Hi,

I think one should use T or T+1 as protection start date for calculations which means that we set the value of a protection payment of a credit event taking place between T-60 and today to zero. Obviously this value is not equal to zero so that one would make an error.

One the other hand in the risk neutral valuation framework it is assumed that all traders have complete market information up to the valuation date. This means that all credit events in the past are known to the traders (which in reality is not the case). By arbitrage arguments this means that one has to set the non default probability at t=0 to 1. Setting the probability to a different value would mean violating the risk neutral valuation framework this doesn't hold?

Best regards
Oliver