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On Prepayment and Rollover Risk in the US Credit Card Market

Author

Listed:
  • Ricardo Serrano-Padial

    (University of Wisconsin - Madison)

  • Lukasz Drozd

    (Wharton School of the University of Pennsylvania)

Abstract

Prepayment risk is a major consideration in the US credit card market. According to industry studies, about 17% of balances are transferred annually. Using a dynamic model of repricing, this paper analyzes the impact of prepayment risk on the functioning of the credit card market. We show that the model can account for the level of balance transfers in the data and is also consistent with the observed change in the cross-sectional dispersion of credit card interest rates, which thus far has been attributed to a more precise pricing of default risk. Importantly, we show that the very features that allow our model to account for the cross-sectional features of the market unveil a novel source of macroeconomic fragility. We quantify the potential of this new channel to account for the observed deleveraging in the credit card market during the 2007-09 financial crisis.

Suggested Citation

  • Ricardo Serrano-Padial & Lukasz Drozd, 2014. "On Prepayment and Rollover Risk in the US Credit Card Market," 2014 Meeting Papers 215, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:215
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    Cited by:

    1. Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    2. Kyle F. Herkenhoff & Gajendran Raveendranathan, 2019. "Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry," Working Papers 2019-071, Human Capital and Economic Opportunity Working Group.
    3. Kyoochul Kim, 2020. "Payment Performance and Residency Discounts in the Rental Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(4), pages 1168-1197, December.
    4. Daniel Grodzicki & Alexei Alexandrov & Özlem Bedre-Defolie & Sergei Koulayev, 2023. "Consumer Demand for Credit Card Services," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(3), pages 273-311, June.

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