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Investing in peer-to-peer lending : risk and return : an empirical analysis of the risk-return relationship in the crowdlending market

Hjermann, Peder Solberg; Jørgensen, Espen Dyve
Master thesis
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masterthesis.PDF (1.014Mb)
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http://hdl.handle.net/11250/2432328
Utgivelsesdato
2016
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  • Master Thesis [3748]
Sammendrag
This paper applies credit-risk pricing theory from literature on bonds to price loans in the peerto-peer

(P2P) lending market. The purpose is to study the risk-adjusted return for investors

investing in P2P loans. Historical data from the loan book of the P2P lending platform Lending

Club, are used to attain estimates for risk in the P2P sector. These estimates are put into an

extended version of the CIR univariate (ECIR) model, which in turn is used to price the loans

issued at the Lending Club platform in 2015.

The main finding is that all of the the interest rates set by Lending Club are higher than the

theoretical interest rates from the ECIR model. This means that Lending Club compensates

investors more than the ECIR model suggests, given the risk they have taken on. Furthermore,

the spread between the two increases as the riskiness of the loan increases. We have considered

plausible explanations for the difference in interest rates, and find that it seems to be connected

to perception of risk and market inefficiency. Still, there are reasons to believe that the

difference in real and modelled interest rates indicates the excistence of excess returns for

inverstors in the P2P lending market. However, further research on P2P lending will be

nescesary to fully understand the risk-return relationship for the investors.

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