What is ‘ABX index’
A financial metric used to assess the entire value of mortgages given to borrowers with subprime or poor credit ratings. When computing the total value of the ABX index, credit default swap contracts are used. The index is constructed of 20 bonds that are each constituted of a group of subprime mortgages. Financial institutions can use this index to evaluate if the market for these assets is improving or deteriorating, which is useful information. Asset-Backed Securities Index is another name for this index.
Explaining ‘ABX index’
By way of example, if the ADX Index rises, it indicates that there is less risk associated with subprime mortgages and vice versa. It was developed by Markit and is of particular importance to investors who are interested in subprime mortgages. Subprime mortgages are mortgages that are granted to consumers who have poor or no credit history.
‘ABX index’ FAQ
What does RMBS stand for?
Residential Mortgage Backed Securities (RMBS) are a special sort of bond that is secured by a huge pool of residential mortgages, which are sold to investors (home loans). However, instead of a small number of loans, RMBS notes often consist of hundreds or thousands of home loans grouped together.
What are subprime mortgages and why were they utilized?
A subprime mortgage is a type of loan that is typically offered to customers who have poor credit histories. Lending institutions frequently charge interest on subprime mortgages at a significantly higher rate than they do on prime mortgages in order to compensate for the greater risk they are taking on.
What is CMBS and RMBS?
A variety of mortgage-backed securities (MBS) are available, the most common of which are commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS) (RMBS). While commercial mortgage-backed securities (CMBS) are backed by big commercial loans, referred to as CMBS or conduit loans, residential mortgage-backed securities (RMBS) are backed by residential mortgages, which are often for single-family houses.
Further Reading
- The subprime credit crisis and contagion in financial markets – www.sciencedirect.com [PDF]
- Knowledge production in financial markets: credit default swaps, the ABX and the subprime crisis – www.tandfonline.com [PDF]
- Causes of the financial crisis – www.tandfonline.com [PDF]
- The pricing of subprime mortgage risk in good times and bad: evidence from the ABX. HE indices – www.tandfonline.com [PDF]
- The bear’s lair: Index credit default swaps and the subprime mortgage crisis – academic.oup.com [PDF]
- Assessing the effectiveness of the Paulson “teaser freezer” plan: Evidence from the ABX index – www.sciencedirect.com [PDF]
- The fractal market hypothesis: applications to financial forecasting – arrow.dit.ie [PDF]
- The economics of structured finance – www.aeaweb.org [PDF]
- Information, liquidity, and the (ongoing) panic of 2007 – pubs.aeaweb.org [PDF]
