The ABX: how do the markets price subprime mortgage risk?

1 September 2008

The ABX family of indices has become a key barometer of subprime mortgage market conditions during the recent financial crisis. Simple regression analysis illustrates the relationship between observed index returns and proxies of default risk, interest rates, market liquidity and risk appetite. The results suggest that declining risk appetite and heightened concerns about market illiquidity have provided a sizeable contribution to the observed collapse in ABX prices since the summer of 2007.

JEL classification: E43, G12, G13, G14.

Includes box: ABX pricing mechanics