The ABX index: A pricing conundrum

The liquidity crisis in the ABS market has led to investors using the ABX index as a valuation tool for individual securities - something the index was never designed for. Ben Logan explains the ramifications of this valuation practice

The Markit ABX index has, in its two years of life, evolved from being an arcane index tracking a set of US home equity market derivatives to becoming a widely watched barometer of the health of the ABS markets. The use of the ABX index has also expanded from pure trading tool to primary input for the valuation of cash ABS portfolios.

It is the use of the ABX as a valuation tool that has proved to be contentious. This should not come as a surprise, given the original purpose of the index. It is a