Your calculation neglects the issue of timeliness. You assume that all the expected damage to firm profitability took place as a result of the movement of p(passage by Oct 31) from 1 to 0.85.
I don’t think that this is the relevant event. The flow of credit is frozen now, and every day that this blockage remains in place causes further damage to the Economy and increases the odds of a Keynesian Death Spiral.
The bailout’s defeat shifted p(Passage in the next few days) from something pretty high to 0, while decreasing p(passage by Oct 31) by a little. In my view, the markets were primarily reacting to the former adjustment.
Your calculation neglects the issue of timeliness. You assume that all the expected damage to firm profitability took place as a result of the movement of p(passage by Oct 31) from 1 to 0.85.
I don’t think that this is the relevant event. The flow of credit is frozen now, and every day that this blockage remains in place causes further damage to the Economy and increases the odds of a Keynesian Death Spiral.
The bailout’s defeat shifted p(Passage in the next few days) from something pretty high to 0, while decreasing p(passage by Oct 31) by a little. In my view, the markets were primarily reacting to the former adjustment.