Research On Investors' Identifying Default Risks Of Borrowers In P2P Lending

Borrowing rate,as one of the most significant factors for the final success of a lending transaction,measures the cost of the borrower and the return of the investor.But more importantly,it should also measure the risk of borrower's default.Then can borrowing rate really accurately reflect the default risk of the borrower?The government may set limits on the borrowing rate;lending platforms may also require a lowest borrowing rate according to the credit rating of the borrower and the loan term;borrowers may jack up the interest rate to achieve a higher probability of obtaining loans.Due to these and other factors,it is possible that the final borrowing rate does not match the level of default risk,that is,borrowing orders with the same borrowing rate may bear different default risks.Then,whether the investors are able to identify default risks will be a key issue.If they fail,the borrowers with high default risks will possibly get the money while those who are willing to pay the same borrowing rate and have low default risks will not finance successfully.It will further result in the loss of protection for the gains of investors,and the borrowers with good credit might quit the platform.It finally leads to the stagnation or even retrogressing of the platform,because the platform will find difficulty in attracting new investors and borrowers and it will even suffer from the abandonment of current users.Therefore,the investors,the borrowers and the platform all have great interest in identifying the real default risks underlying the orders.At first,this paper uses the data from renrendai.com between October 13,2010 and October 9,2015 to examine the relationship between the borrowing rate and the default risk of a borrower.It turns out compared to just only interest rate,interest rate combined with some other public information could better reflect the default risk of a borrower.That is,there is asymmetry between the interest rate and default risk.Empirical results also show a conclusion contrary to common sense:the higher a borrower's income is,the greater the default risk is.Why do people with high-income choose to borrow money from P2P platform with high cost?This paper tries to explain the conclusion above by answering this question.Furthermore,full funded time is used as an index to study whether investors can identify the orders with the same interest rate and different default risks.We find that the orders with higher default risks need longer time to become full funded,which indicate that investors can identify default risks.Third,this paper finds that investors may make mistakes about the relationship between certain information(income,age education and marriage)of a borrower and the default risk.Then why can investors identify default risks?This paper provides a possible explanation:investors may make mistakes about the relationship between certain information of a borrower and the default risk,but they pay more attention to a borrower's credit risk,loan amount and loan term,which are the main influential factors for the default risk;at the same time,they have a good knowledge between these information and the default risk,so they can identify default risks.Forth,this paper wants to know whether the behavior of investors' identifying default risks changes over time.It turns out investors started with no ability to identify default risks,by learning can they do.Finally this paper makes five robustness tests.The results have no difference.