What is the ABX Index?

The ABX index is an economic reference point that gauges the monetary worth of the investment market for subprime mortgages with lowered interest rates. The index comprises 20 residential mortgage-backed securities or RMBS.

How does the ABX Index Work?

The ABX index, also referred to as an asset-backed securities index, ABX.HE index, or Market ABX equity index, has six subdivisions, each with credit default swaps from 20 subprime mortgages used by borrowers with low credit ratings. The index represents the various levels of the borrowers abilities to pay off debt. The ABX index value gets calculated each day. Markit is the index administrator who reorganizes the index every six months on January 19 and July 19 as sliding dates. The firm looks at all the residential mortgage-backed securities (RMBS) circulated during the six months between the two periods. Institutions, such as Bank of America, Goldman Sachs, Merril Lynch, Citigroup, and other investor parties participate in the direct exchange of vast chunks of properties used as collateral for loans in the fourth market, which is done through a computer network instead of a trade. Markit determines if the exchange of credit risks in the fourth market should be considered as indicators of repayment levels to get included in the ABX index. The values of the asset-backed securities index include a range from 50 to 100. Only subscribers of the RMBS market have exclusive access to this data, which they can use to figure out whether the dollar market is doing well or if it is at high risk. Risks are assessed with decreases of the ABX index and conversely, increases indicate good market transactions. Before the worst of the financial crisis of 2007, the ABX index was 55. Now, it is about 100 which shows the improvement of the dollar market.