The liquidity aspects of peer-to-peer lending

Purpose - The purpose of this paper is to investigate investor behavior in the market of peer-to-peer lending, which is an alternative form of finance, from the liquidity perspective. Design/methodology/approach - Liquidity metrics and regressions are used to identify the trend of the market and the variables that significantly impact the successful resale, selling time and discount rate in the secondary market. Structural break analysis is used to examine the impact of COVID on the market. Findings - There is a high demand for performing loans that are sold quickly; however, the discount rate is also high, which reflects the price of liquidity. Based on the results obtained from regressions, the main factors that impact the investors’ decisions are discount rate, borrower’s country, principal and the month passed after loan origination. Furthermore, it can be concluded that the pandemic has led to a structural break in March 2020, and investors have started to liquidate their claims. Practical implications - This paper’s purpose is to add to the research that examines the secondary market in social lending. It also contributes to the understanding of an investor’s decision and behavior, which are key parts of the segment’s long-term sustainability from the demand perspective. The comprehensive understanding of a lender’s behavior is also essential for supervisory authorities and other participants of the financial market. Originality/value - Previous studies mostly focused on credit risk aspects, whereas this paper contributes to the modest research of liquidity features. The added value of this paper is further supported by the use of a large European secondary market data set, including more than 5 million transactions, covering an 18-month horizon. Moreover, the market’s sensitivity is analyzed in the case of an external shock. In the beginning of 2020, the COVID outbreak caused an economic shutdown in many European countries. The paper examines how these uncertain economic conditions impact the secondary market.