Macroeconomic environment and the future performance of loans: Evidence from three peer-to-peer platforms

The literature on peer-to-peer loan market performance focuses predominantly on the microlevel variables connected to individual borrower or loan characteristics. We hypothesize that the economic environment, reflected by macroeconomic variables at the time of loan origination, should play a role in explaining loans’ future performance. Our dataset comprises two US-based platforms and one UK-based platform, which provides a rich field to verify our hypothesis with numerous loan-related variables. Specifically, we consider Lending Club with 1,169,976 individual loans and 128 variables, Prosper with 386,685 loans and 142 variables, and Zopa with 440,493 loans and 192 variables. Using linear and threshold regressions, we observe three main findings: (i) accounting for the macroeconomic environment systematically improves our understanding of the variation in the future performance of individual loans; (ii) demand-side variables, particularly the unemployment rate and industrial production, have stronger effects as supply-side and economic uncertainty variables; and (iii) the importance (effect size) of the macroeconomic environment is at least at the level of that of calendar and geographic variables but much smaller than the importance of loan or borrower characteristics. These results suggest that the economic environment might be useful in individual loan-level credit risk models.