Peer-to-Peer Lending from a CDO Perspective

Abstract: In this thesis, we will attempt to model a peer-to-peer lending intermediary according to a CDO. A CDO is a credit risk protection product that distributes credit risk among investors. The business of a peer-to-peer lending intermediary is to connect individuals who want to borrow money with individuals who want to lend. With the increasing popularity of peer-to-peer lending, it is of interest to study the portfolio credit risk that is inherent to such a business, not the least in anticipation of a possible downturn in the economy that is likely to follow once interest rates rise again. To the best of our knowledge, this is the first study that makes a rigorous attempt to examine peer-to-peer lending from a credit risk portfolio point of view. In particular, the CDO perspective seems to fit nicely into the peer-to-peer lending framework, and also gives us answers to, for instance, what a fair interest rate should be for lenders. We find that the CDO-structure can be a viable way to profitably structure the business of peer-to-peer lending given the assumptions and the inputs that we use in our model.