The ABX indices were a double-edged sword during the recent credit crisis. The indices were one of the only available sources of information on the market pricing of risk surrounding subprime securities. Thus, the indices provided transparency. This transparency caused dealer banks to question the abilities of their counterparties to honor MBS obligations. The transparency provided by the indices fed fears and panic surrounding subprime securities because it solidified that the risk of subprime securities was real. The arbitrage relationship between the ABX indices and the underlying mortgage bonds did not hold during the crisis. |
