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Understanding the ABX Index and How It Works

Understanding the ABX Index and How It Works

What Is the ABX Index?

The ABX Index represents 20 subprime residential mortgage-backed securities (RMBS). Created by market intelligence firm Markit, it is used as a financial benchmark measuring the value and performance of the subprime residential mortgage market.

Key Takeaways

  • The ABX Index tracks the 20 largest residential MBS.
  • It is used as a barometer for market health within the subprime residential real estate sector.
  • The Index is updated twice per year.
  • Although it represents subprime mortgage-backed securities, it should not be the sole indicator for overall market conditions.

How the ABX Index Works

The ABX Index utilizes credit default swaps to provide an index representative of the subprime RMBS market. Values range from 50 to 100, with daily pricing available for market subscribers. It is also known as the Markit ABX Home Equity Index, ABX.HE Index, or asset-backed securities index.

The ABX Index uses credit default swaps on the 20 largest subprime residential mortgage-backed securities (MBS) selected for the Index. It has six sub-indexes representing varying levels of credit quality among RMBS tranches, providing a comparison of subprime credit in the market.

The Index is reconstituted semi-annually on roll dates, January 19 and July 19, or the next business day following each date. Markit serves as the administrator and reviews all market issuance of subprime residential mortgage-backed securities in the prior six months for inclusion in the next roll date. Markit then identifies the corresponding credit default swaps traded on fourth market exchanges for inclusion in the Index.

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Special Considerations: Indicators

Values for the ABX Index are calculated daily and provided to subscribers. Increases in the Index indicate a well-performing RMBS market, while significant decreases and lower values are warning signs of high risk. Since the ABX Index is one of the leading market indicators in the subprime RMBS market, institutional investors and traders use it broadly as a gauge for risk and value levels. The details of the Index are not disclosed publicly, requiring trading groups to license the data from Markit to use as a steady resource for determining market trades.

Values for the ABX Index are calculated daily and provided to subscribers. Increases in the Index indicate a well-performing RMBS market, while significant decreases and lower values are warning signs of high risk. Since the ABX Index is one of the leading market indicators in the subprime RMBS market, institutional investors and traders use it broadly as a gauge for risk and value levels. The details of the Index are not disclosed publicly, requiring trading groups to license the data from Markit to use as a steady resource for determining market trades.

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