Work in Progress
One of the frontier Web 2.0 applications is online peer-to-peer (P2P) lending marketplace, where individual lenders and borrowers can virtually meet for loan transactions. From a lender’s perspective, she not only wants to lower investment risk but also to gain as much return as possible. However, P2P lenders possess the inherent problem of information asymmetry that they don’t really know if a borrower has capability to pay the loan or is truthfully willing to pay it in due time, leading them to a disadvantaged situation when making the decision of lending money to the borrower. This study intends to consider the loan allocation as an optimization research problem using the research framework based upon modern portfolio theory with the aim of helping lenders achieve the two goals of gaining high return and lowering risk at the same time. The expected results of this research are twofold: 1) compared to a logistic regression based credit scoring method, we expect to make more profits for lenders with risk level unchanged, and 2) compared to a linear regression based profit scoring method, we expect to lower risk without lowering return. Our proposed new model could offer insights into how individual lenders can optimize their loan allocation strategies when considering return and risk simultaneously.
Rong, Yuting; Huang, Wei W.; Lai, Xin; Jiang, Cheng J.; Peng, Yangzi; and Liu, Linzi, "Proposing a New Research Framework for Loan Allocation Strategies in P2P Lending" (2018). ICEB 2018 Proceedings. 19.