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Semiparametric estimation of default probability: Evidence from the Prosper online credit market

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  • Li, Xiaofeng
  • Shang, Ying
  • Su, Zhi

Abstract

This paper examines the effects of a person’s past financial characteristics on his likelihood to default in ex-post loan performance using both Probit and a semiparametric single-index estimator proposed by Klein and Spady (1993). The data used in the paper are a sample of individual loans generated on Prosper, a large US online lending market. The out of sample predictions and the model specification test suggest a misspecification of the Probit model due to the violation of the normality assumption. Estimation results suggest that a borrower’s past financial credit score is a reasonably good indicator of one’s loan performance. In general, the higher one’s credit score ranking, the lower the probability that one would default. One exceptional finding is that a borrower with score ranking B is less likely to default than a borrower with score ranking A. Such a finding suggests that individuals who are in the middle range of credit grades may be more financially credit-dependent than those with higher rankings. As a result, they are more willing to keep their loans in good standings.

Suggested Citation

  • Li, Xiaofeng & Shang, Ying & Su, Zhi, 2015. "Semiparametric estimation of default probability: Evidence from the Prosper online credit market," Economics Letters, Elsevier, vol. 127(C), pages 54-57.
    • Handle: RePEc:eee:ecolet:v:127:y:2015:i:c:p:54-57
    DOI: 10.1016/j.econlet.2014.11.033
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    References listed on IDEAS

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    Cited by:

    1. Henry Penikas, 2023. "IRB Asset and Default Correlation: Rationale for the Macroprudential Mark-Ups to the IRB Risk-Weights," Risk Management, Palgrave Macmillan, vol. 25(1), pages 1-27, March.
    2. Dmitriy Borzykh & Henry Penikas, 2021. "IRB PD model accuracy validation in the presence of default correlation: a twin confidence interval approach," Risk Management, Palgrave Macmillan, vol. 23(4), pages 282-300, December.
    3. Henry Penikas, 2020. "IRB Asset and Default Correlation: Rationale for the Macroprudential Add-ons to the Risk-Weights," Bank of Russia Working Paper Series wps56, Bank of Russia.

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    More about this item

    Keywords

    Semiparametric method; Single index model; Default probability;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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