ABX Index - Explained
What is the ABX Index?
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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.
Academic Research on ABX Index
- Information, liquidity, and the (ongoing) panic of 2007, Gorton, G. (2009). Information, liquidity, and the (ongoing) panic of 2007. American Economic Review, 99(2), 567-72. The credit crisis and panic of 2007 was due to the failure of the housing prices to rise which led to distrust in the credit markets. The APX index was the only way to transparently see the value of traded subprime residential mortgage-back securities through subprime-related instruments.
- Leveraged losses: lessons from the mortgage market meltdown, Greenlaw, D., Hatzius, J., Kashyap, A. K., & Shin, H. S. (2008, February). Leveraged losses: lessons from the mortgage market meltdown. In Proceedings of the US monetary policy forum (Vol. 2008, pp. 8-59). During the credit crisis of 2007, there was a decline in leverage with falling asset prices and various markets branched off with intense distress.
- Causes of the financial crisis, Acharya, V. V., & Richardson, M. (2009). Causes of the financial crisis. Critical Review, 21(2-3), 195-210. There were two ways the residential part of the economy fell. First, banks did not record specific assets on a balance sheet. Assets that could potentially mature but without foreseeable control by a company or loans had no financial safeguard. Secondly, for the assets recorded on the balance sheets, there was a reduced amount of financing held against them.
- The subprime credit crisis and contagion in financial markets, Longstaff, F. A. (2010). The subprime credit crisis and contagion in financial markets. Journal of financial economics, 97(3), 436-450. I investigated subprime asset-backed CDOs or collateralized debt obligations and provided evidence of undesirable influence on other markets, not just mortgages. I hypothesize that the economic weight increased because of the channels where assets could not cover the current debt and not necessarily because of the passage of associated information. With the ABX index, there is extraordinary proof that puts to question whether the market prices transitioned to a specific amount because of unreliability.
- Train wrecks: asset pricing and the valuation of severely distressed assets, Longstaff, F. A., Schulist, S., & Wang, J. (2008). Train wrecks: asset pricing and the valuation of severely distressed assets. We examine how investors who want to avoid risk unless adequately compensated do not know the full extent of damage causing the credit decline. More of these investors put more from their pool of investments into risky assets, hoping to get more in return with causes an increase of stock trading that the ABX index predicted three weeks before the subprime credit crisis.
- The ABX: how do the markets price subprime mortgage risk?, Fender, I., & Scheicher, M. (2008). The ABX: how do the markets price subprime mortgage risk?. BIS Quarterly Review September. The ABX index and subdivisions act as an important gauge of how the decline in subprime mortgage market circumstances are directly related to the decreased willingness of the market to accept a certain level of risks. The loss of cash in the market had a massive impact on the downfall of ABX prices.
- How did financial reporting contribute to the financial crisis?, Barth, M. E., & Landsman, W. R. (2010). How did financial reporting contribute to the financial crisis?. European accounting review, 19(3), 399-423. We bring attention to how investors were unaware of the risk they were taking with investments because it was not clear what the values were for the banks cash and claims against those assets. We believe that those who set the standards of accounting are not responsible for securing the financial system but instead the bank regulators need to make changes, so that that the financial system is secured.
- The return of the credit cycle: old lessons in new markets, Gieve, J. (2008). The return of the credit cycle: old lessons in new markets. Bank of England. Quarterly Bulletin, 48(1), 91. Sir John Gieve addresses how previous bank cycles can provide insight into the new market because, in the past, there was overconfidence and bad lending since asset prices increased and interest rates were low. The downturn that came as a result of this mishandled financial growth is replaying in the housing sector in the U.S., which is affecting healthy economies elsewhere.
- The pricing of subprime mortgage risk in good times and bad: evidence from the ABX. HE indices, Fender, I., & Scheicher, M. (2009). The pricing of subprime mortgage risk in good times and bad: evidence from the ABX. HE indices. Applied Financial Economics, 19(24), 1925-1945. This article takes an in-depth look at the pricing of losses from borrowers not being able to repay interest that is lower than the interest charged to creditworthy borrowers. Pricing models are inadequate because they do not take into consideration how much risk will be allowed during stressful periods and how much loss will occur without there being enough cash to cover those risks.
- The subprime panic, Gorton, G. (2009). The subprime panic. European Financial Management, 15(1), 10-46. I describe how connected investments were sensitive to the prices of houses during the credit crisis. I look at how unidentical information came from the complexity of how investors invested money. The risk from these investments did not get spread transparently, but trading in the ABX index showed details of how it was all connected to the subprime bonds.