An Analysis of The Future of Peer-to-Peer Lending: Is P2P-lending a Relevant Asset Class for Investors?

Thea Feginn & Mariann Udnesseter

Student thesis: Master thesis


Peer-to-peer (P2P) lending is a fast-growing financial technology (Fintech) trend, attracting many investors. Studies on P2P-lending have focused on limiting asymmetricinformation or determinants of default. However, limited research has focused on thefuture of P2P-lending as a relevant asset class for investors and how macroeconomic conditions, regulation and future uncertainties in the market will affect the attractiveness ofthe asset class.Using a sample of 615,573 loans from the U.S. P2P-lending platform LendingClub, thisstudy employs a four-part methodology to analyze and compare the attractiveness of theP2P-lending market with traditional credit asset classes in terms of their risks and theirreturns. In particular, Part I and Part II apply logistic regression models to determine thecharacteristics of default. The subsequent parts (III and IV) calculate the expected returnof LendingClub’s investors and analyze the relationship between risks and returns withother credit assets. Specifically, we look at the expected return, probability of default,Loss Given Default and Sharpe ratio. Lastly, supplementing our empirical findings, wepresent the future uncertainty of regulation and changes in the competitive environment.We find that grade A loans on LendingClub are equivalent to Junk bonds and concludethat P2P-lending is a relevant asset class for risk-seeking investors. In light of the rapidgrowth of P2P-lending, the results from our methodology suggest that irrationality, lack offinancial expertise, as well as herding behavior, are characteristics explaining P2P-lendinginvestors. Additionally, accounting for the macroeconomic factors, this study shows thatthe default rate of loans has a significant negative relation to economic downturns. Considering the future risks and uncertainties in regards to macroeconomic conditions, newregulations and changes in the market, this study shows that the risks associated withP2P-lending are far greater than its returns and that a rational investor should in theorynot be choosing P2P-loans over government and investment grade corporate bonds.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final ThesisMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2019
Number of pages120