The Art of Credit Derivatives: Demystifying the Black Swan

18

More Standardized Credit Indices: ABX, TABX, CMBX, LCDX, LevX

Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.

Mark Twain

18.1 INTRODUCTION

In Chapter 8 we gave a brief description of the corporate standardized credit indices. The corporate indices have brought liquidity to the underlying asset class besides serving the purpose of hedging corporate credit instruments. Many practitioners, for example, take the deterioration on the XOver spreads as an early signal of generalized market deterioration. In this chapter, we describe the ABX.HE index and its tranches TABX.HE, the standardized credit instruments for subprime home equity MBS. Similar to the corporate case the indices have been introduced to bring liquidity to the underlying asset class and to serve as a hedge for portfolios of subprime MBS.

In June 2007 the market was developing structured finance indices for many asset classes such as credit card receivables, auto loans and student loans. The idea has always been that the innovation behind the indices bring liquidity to the underlying asset class.

In Chapter 22 we show that these indices are important instruments for identifying the deterioration on the subprime MBS market. We think that after the normalization of the market those indices will serve as important mechanisms for the price discovery process for the underlying asset class.

The remainder of this ...