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Estimating probability of default via delinquencies? Evidence from European P2P lending market

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  • Nigmonov, Asror
  • Shams, Syed
  • Urbonas, Povilas

Abstract

The unprecedented growth of the financial sector's digital transformation opens wide areas to the scaling up of finance in innovative and knowledge-based projects. Improving risk management takes centre stage in the acceleration of this process. This study uses loan-book data from the peer-to-peer (P2P) lending market to empirically investigate the determinants of default risk. Using the loan-book database covering the period from 2014 to 2020, we examine multiple factors related to the default risk of loans issued by P2P lending platforms. The results indicate that a higher interest rate and higher stock market returns increase the probability of default in the P2P lending market. Results are robust to additional tests based on endogeneity correction, the LASSO method and sampling bias. The severity of the impact of market returns and interest rates is found to be significantly different based on the levels of financial technology (FinTech) adoption and banking sector distress. Increases in the market interest rate are found to boost the sensitivity of P2P loan defaults to stock market volatility. This study contributes to existing literature on risk management models with its consideration of country-specific factors, paving the way to future best practices in the market.

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  • Nigmonov, Asror & Shams, Syed & Urbonas, Povilas, 2024. "Estimating probability of default via delinquencies? Evidence from European P2P lending market," Global Finance Journal, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:glofin:v:63:y:2024:i:c:s1044028324001224
    DOI: 10.1016/j.gfj.2024.101050
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    Keywords

    Peer-to-peer lending; FinTech; Default; Marketplace lending; Panel data: LASSO method;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    Statistics

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    Corrections

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