Default or profit scoring credit systems? Evidence from European and US peer-to-peer lending markets

Kód výsledku v IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F00216224%3A14560%2F22%3A00127161" target="_blank" >RIV/00216224:14560/22:00127161 - isvavai.cz</a>

Výsledek na webu

<a href="https://jfin-swufe.springeropen.com/articles/10.1186/s40854-022-00338-5" target="_blank" >https://jfin-swufe.springeropen.com/articles/10.1186/s40854-022-00338-5</a>

DOI - Digital Object Identifier

<a href="http://dx.doi.org/10.1186/s40854-022-00338-5" target="_blank" >10.1186/s40854-022-00338-5</a>

Jazyk výsledku

angličtina

Název v původním jazyce

Default or profit scoring credit systems? Evidence from European and US peer-to-peer lending markets

Popis výsledku v původním jazyce

For the emerging peer-to-peer (P2P) lending markets to survive, they need to employ credit-risk management practices such that an investor base is profitable in the long run. Traditionally, credit-risk management relies on credit scoring that predicts loans’ probability of default. In this paper, we use a profit scoring approach that is based on modeling the annualized adjusted internal rate of returns of loans. To validate our profit scoring models with traditional credit scoring models, we use data from a European P2P lending market, Bondora, and also a random sample of loans from the Lending Club P2P lending market. We compare the out-of-sample accuracy and profitability of the credit and profit scoring models within several classes of statistical and machine learning models including the following: logistic and linear regression, lasso, ridge, elastic net, random forest, and neural networks. We found that our approach outperforms standard credit scoring models for Lending Club and Bondora loans. More specifically, as opposed to credit scoring models, returns across all loans are 24.0% (Bondora) and 15.5% (Lending Club) higher, whereas accuracy is 6.7% (Bondora) and 3.1% (Lending Club) higher for the proposed profit scoring models. Moreover, our results are not driven by manual selection as profit scoring models suggest investing in more loans. Finally, even if we consider data sampling bias, we found that the set of superior models consists almost exclusively of profit scoring models. Thus, our results contribute to the literature by suggesting a paradigm shift in modeling credit-risk in the P2P market to prefer profit as opposed to credit-risk scoring models.

Název v anglickém jazyce

Default or profit scoring credit systems? Evidence from European and US peer-to-peer lending markets

Popis výsledku anglicky

For the emerging peer-to-peer (P2P) lending markets to survive, they need to employ credit-risk management practices such that an investor base is profitable in the long run. Traditionally, credit-risk management relies on credit scoring that predicts loans’ probability of default. In this paper, we use a profit scoring approach that is based on modeling the annualized adjusted internal rate of returns of loans. To validate our profit scoring models with traditional credit scoring models, we use data from a European P2P lending market, Bondora, and also a random sample of loans from the Lending Club P2P lending market. We compare the out-of-sample accuracy and profitability of the credit and profit scoring models within several classes of statistical and machine learning models including the following: logistic and linear regression, lasso, ridge, elastic net, random forest, and neural networks. We found that our approach outperforms standard credit scoring models for Lending Club and Bondora loans. More specifically, as opposed to credit scoring models, returns across all loans are 24.0% (Bondora) and 15.5% (Lending Club) higher, whereas accuracy is 6.7% (Bondora) and 3.1% (Lending Club) higher for the proposed profit scoring models. Moreover, our results are not driven by manual selection as profit scoring models suggest investing in more loans. Finally, even if we consider data sampling bias, we found that the set of superior models consists almost exclusively of profit scoring models. Thus, our results contribute to the literature by suggesting a paradigm shift in modeling credit-risk in the P2P market to prefer profit as opposed to credit-risk scoring models.

Druh

J_imp - Článek v periodiku v databázi Web of Science

CEP obor

—

OECD FORD obor

50206 - Finance

Projekt

—

Návaznosti

R - Projekt Ramcoveho programu EK

Rok uplatnění

2022

Kód důvěrnosti údajů

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Název periodika

Financial Innovation

ISSN

2199-4730

e-ISSN

2199-4730

Svazek periodika

8

Číslo periodika v rámci svazku

1

Stát vydavatele periodika

US - Spojené státy americké

Počet stran výsledku

21

Strana od-do

1-21

Kód UT WoS článku

000780912200001

EID výsledku v databázi Scopus

2-s2.0-85128162625