Tuesday, January 15, 2013

Are Credit Default Swaps on US Debt Constitutional?

A credit default swap (CDS) is insurance on a fixed income security. If the underlying asset defaulted, then the party that purchased the CDS is paid the par value of the security. If one purchases a CDS, that person is assuming there is a risk that the security will not be paid in full. In effect one is "questioning" the credit worthiness of the asset.

Which brings us to the 14th amendment. In section 4 it states: "The validity of the public debt of the United States .... shall not be questioned". So, are CDS' constitutional when the underlying asset is a US bond?

Maybe its constitutional to sell a CDS on US bonds (since a seller can argue they thought there was no risk ie. not questioning the validity). But the buyer is implicitly assuming there is a risk.

Will this technicality ever matter? Probably not. The odds of the US defaulting seems small. And if we did default I think we'd be more worried about other things. Either way, I'm glad to live in a country where I'm allowed to question. 

Tuesday, January 8, 2013

Power Laws and Mass Shootings

One of the more striking results (at least to me) in Nate Silver’s “The Signal and the Noise” is the ubiquitous nature of power laws. They appear to accurately describe such randomly occurring events as earthquakes (chapter 5) to terrorist attacks (chapter 13).

A good introduction to power can be found here. I will say that a power law can describe data if, after computing an empirical cumulative distribution function, you log both axis (to create a “log – log” plot) and if the relationship appears to be linear then it is a power law.

Can a power law describe such apparently random events as indiscriminate mass shootings such as the Newtown, CT Massacre? Mother Jones (here) has a dataset that includes 62 Mass Shootings from August 1982 up to December 2012 and the number of total victims (these include injured).

Below are the two graphs I made to distinguish. The first one is just a normal ECDF, the second graph is a log – log of the first.

It appears the log – log fits the data much more accurately than the first. It therefore appears that number of victims in mass shootings follows a power law.