Accessing Information Asymmetry in Peer-to-Peer Lending by Default Prediction from Investors’ Perspective

Abstract

Recent a few years have witnessed the rapid expansion of the peer-to-peer lending marketplace. As a new field of investment and a novel channel of financing, it has drawn extensive attention throughout the world. Many investors have shown great enthusiasm for this field. However, investors are at the disadvantage of information asymmetry, which is a key issue in this marketplace that is unavoidable and can lead to moral hazard or adverse selection. In this paper, we propose an L 1 / 2 -regularized weighted logistic regression model for default prediction of peer-to-peer lending loans from investors’ perspective, which can reduce the impact of information asymmetry in the process of loan decision. Rather than solely focus on the accuracy of the prediction, we take into consideration the different risk preferences of different investors. We try to find a trade-off between the risk of losing principal and that of losing potential investment opportunities on the basis of investors’ risk preferences. Meanwhile, due to the nature of peer-to-peer lending loans, we add an L 1 / 2 -regularization term to reduce the chance of overfitting. Xu’s algorithm for L 1 / 2 -regularization problems is applied to solve our model. We perform training, in-sample test, and out-of-sample test with data from LendingClub. Numerical experiments demonstrate that regularization could enhance out-of-sample the area under the Precision–Recall curve (AUPRC). By applying the proposed model, the risk-averse investors could apply a higher penalty factor to lower the risk of losing principal at the cost of the loss of some potential investment opportunities according to their own risk preferences. This model can help investors reduce the impact of information asymmetry to a great extent.

Is information transparency important for funders? A case study of sharia P2P lending companies in Indonesia

“…Previous research has examined the relationship between information disclosure in P2P lending and funding success and default rates (e.g., Chen et al, 2022;Ge et al, 2016;Michels, 2012;Wang et al, 2021) and information asymmetry in P2P lending (such as Linet al, 2013;Riggins & Weber, 2017;Wei et al, 2020;Yan et al, 2015). However, previous studies have not examined how information asymmetry and information transparency practices occur in sharia P2P lending.…”