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Rationality of Investors in P2P Online Lending Platform with Guarantee Mechanism: Evidence in China

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  • Nanfei Zhang

Abstract

This paper investigates whether investors in P2P online lending platforms in China are rational. In China, most P2P platforms run a guarantee mechanism using loan loss provision. I take into account the effect of the guarantee mechanism on loan's cash flow and calculate expected internal rate of return of each loan. The empirical results show evidence against rationality assumption. Firstly, expected return calculated under guarantee mechanism of a loan in China is not only affected by systematic risk, but also by idiosyncratic risk. Secondly, China P2P investors do not maximize their expected return. They take into account other variables although their influence on default and prepayment risk is already reflected in the expected return. Conclusively, China P2P investors are not rational. The guarantee mechanism might contribute to some of the findings.JEL classification numbers: G110 G120 G140 G170 G210Keywords: Rational expectation, Expected return, CAPM, Guarantee mechanism.

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  • Nanfei Zhang, 2017. "Rationality of Investors in P2P Online Lending Platform with Guarantee Mechanism: Evidence in China," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(3), pages 1-8.
    • Handle: RePEc:spt:apfiba:v:7:y:2017:i:3:f:7_3_8
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    References listed on IDEAS

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    1. Nataliya Barasinska, 2011. "Does Gender Affect Investors' Appetite for Risk?: Evidence from Peer-to-Peer Lending," Discussion Papers of DIW Berlin 1125, DIW Berlin, German Institute for Economic Research.
    2. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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    Cited by:

    1. Li, ZhouPing & Ge, RuYi & Guo, XiaoShuang & Cai, Lingfei, 2021. "Can individual investors learn from experience in online P2P lending? Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    2. Wang, Chengfu & Chen, Xiangfeng & Jin, Wei & Fan, Xiaojun, 2022. "Credit guarantee types for financing retailers through online peer-to-peer lending: Equilibrium and coordinating strategy," European Journal of Operational Research, Elsevier, vol. 297(1), pages 380-392.
    3. Gao, Guang-Xin & Fan, Zhi-Ping & Fang, Xin & Lim, Yun Fong, 2018. "Optimal Stackelberg strategies for financing a supply chain through online peer-to-peer lending," European Journal of Operational Research, Elsevier, vol. 267(2), pages 585-597.

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