A:

Markit Group Ltd. created the ABX index as a synthetic basket of goods designed to provide feedback on the subprime mortgage market. The ABX itself is broken into five separate indexes, each of which represents a "tranche" of 20 credit default swaps, also known as credit default obligations, that are secured with subprime mortgage loans. The tranches are grouped by credit rating, ranging from AAA to BBB-minus. Every six months, a new series is issued based on the largest present deals. A higher value in any given ABX index correlates with decreased subprime mortgage risk.

Coincidentally, the ABX was launched just before the collapse of the subprime lending market in 2007-2009. The ABX indexes "trade on price," meaning that an index itself is bought and sold at the value of its underlying securities. Because of this, the performance of the indexes roughly mirrored the performance of the credit default swaps during the financial crisis, which was very poor. It is important to note, however, that the ADX does not provide the value of any one specific credit default swap. (See also: How do traders use the ABX index?)

Some analysts considered the sharp declines in the ABX to be leading indicators of the coming crisis prior to 2008. There was a temporary rally in spring 2007, but that was followed by even sharper declines. The AAA index, which theoretically should have been the most secure and most valuable of all of the ABX indexes, dropped by more than 50% in value from the middle of 2007 to early 2009. The lower tranches dropped far more dramatically; the BBB-minus was below 10, a drop in value greater than 90%, by April 2008.

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RELATED TERMS
  1. Subprime Market

    The market for lenders and borrowers of subprime credit, a credit ...
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    General term for borrowings of subprime debt, or loans made to ...
  4. Subprime Loan

    A type of loan that is offered at a rate above prime to individuals ...
  5. Subprime Rates

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  6. Subprime Lender

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