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

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  • Ingo Fender
  • Martin Scheicher

Abstract

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.

Suggested Citation

  • Ingo Fender & Martin Scheicher, 2008. "The ABX: how do the markets price subprime mortgage risk?," BIS Quarterly Review, Bank for International Settlements, September.
    • Handle: RePEc:bis:bisqtr:0809h
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    References listed on IDEAS

    as
    1. Bruce Mizrach, 2008. "Jump and Cojump Risk in Subprime Home Equity Derivatives," Departmental Working Papers 200802, Rutgers University, Department of Economics.
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    Citations

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    Cited by:

    1. Flavin, Thomas J. & Sheenan, Lisa, 2015. "The role of U.S. subprime mortgage-backed assets in propagating the crisis: Contagion or interdependence?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 167-186.
    2. Sheri Markose & Simone Giansante & Mateusz Gatkowski & Ali Rais Shaghaghi, 2010. "Too Interconnected To Fail: Financial Contagion and Systemic Risk In Network Model of CDS and Other Credit Enhancement Obligations of US Banks," Working Papers 033, COMISEF.
    3. Balla, Eliana & Carpenter, Robert E. & Robinson, Breck L., 2011. "Assessing the effectiveness of the Paulson "teaser freezer" Plan: Evidence from the ABX index," Journal of Economics and Business, Elsevier, vol. 63(5), pages 392-411, September.
    4. Christian Laux & Christian Leuz, 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 93-118, Winter.
    5. Biais, Bruno & Heider, Florian & Hoerova, Marie, 2014. "Risk-sharing or risk-taking? An incentive theory of counterparty risk, clearing and margins," IDEI Working Papers 834, Institut d'Économie Industrielle (IDEI), Toulouse.
    6. Ingo Fender & Martin Scheicher, 2009. "The pricing of subprime mortgage risk in good times and bad: evidence from the ABX.HE indices," Applied Financial Economics, Taylor & Francis Journals, vol. 19(24), pages 1925-1945.
    7. Gorton, Gary & Metrick, Andrew & Xie, Lei, 2021. "The flight from maturity," Journal of Financial Intermediation, Elsevier, vol. 47(C).
    8. Beltratti, Andrea & Spear, Nasser & Szabo, Mark Daniel, 2013. "The Value Relevance and Timeliness of Write-downs During the Financial Crisis of 2007–2009," The International Journal of Accounting, Elsevier, vol. 48(4), pages 467-494.
    9. Lisa Sheenan, 2017. "Analyzing Contagion from the U.S. Subprime Mortgage-Backed Securities Market," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 5(4), pages 85-123.
    10. Abdala Rioja, Yamile E, 2011. "All Things Considered: The Interaction of the Reasons for the Financial Crisis," MPRA Paper 33408, University Library of Munich, Germany.
    11. Frank J. Fabozzi & Robert J. Shiller & Radu S. Tunaru, 2020. "A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?," Journal of Economic Perspectives, American Economic Association, vol. 34(4), pages 121-145, Fall.
    12. Scheicher, Martin & Fender, Ingo, 2009. "The pricing of subprime mortgage risk in good times and bad: evidence from the ABX.HE indices," Working Paper Series 1056, European Central Bank.
    13. Dushyantkumar Vyas, 2011. "The Timeliness of Accounting Write‐Downs by U.S. Financial Institutions During the Financial Crisis of 2007–2008," Journal of Accounting Research, Wiley Blackwell, vol. 49(3), pages 823-860, June.
    14. Levitin, Adam & Wachter, Susan, 2012. "Explaining the Housing Bubble," MPRA Paper 41920, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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