On Tuesday, May 29 ICEF and Laboratory of Financial Economics (LFE) held the Research Seminar in Finance.
Speaker: Professor Oren Sussman (Saïd Business School, University of Oxford), LFE invited researcher
Theme: "Marketplace Lending, Information Aggregation, and Liquidity"
Abstract: We analyze an electronic peer-to-business lending platform for small-and-medium-sized British companies, operated by Funding Circle. We examine a unique data set of 7,516 loan auctions involving 34 million orders, containing information on order size, price, time of submission and the identity of the investor. We find an active price-discovery process that revealed valuable information about the loan's likelihood of default, over and above the loan's credit score. Nevertheless, information efficiency was not reached as interest rates overreacted to default risk. We find that this overpricing of loans was heightened during periods of liquidity shortages, and the problem was exacerbated over time as demand for loans grew. Investors could bid directly or delegate the bidding decision to an algorithm administered by the platform. We find that this delegated allocation mechanism played a role in mitigating the overreaction problem, at an interest rate discount to algorithmic bidders. Our findings shed light on the market design of Fintech platforms.