Behind Wall Street's subprime fear index

The formerly obscure ABX index has become a closely watched gauge of just how bad the market for subprime securities is getting.

How the ABX works
How the ABX works
The ABX tracks the performance of a basket of credit default swaps based on U.S. subprime home loans. Credit default swaps, which are like insurance contracts, allow buyers and sellers to trade risk.

In the case of the ABX, these financial instruments allow traders and investors to take positions on subprime securities without actually holding them.

The index is by no means perfect - traders use credit default swaps as a betting tool, which can skew prices - and it doesn't reflect the true value of the underlying securities. But it does offer a gauge of the demand for them. A decline in the ABX suggests that the securities have become more risky and that investors have lost confidence in them.


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