Research on P2P product portfolio strategy based on term structure under risk reserve system

• Published in: International review of economics & finance 2023-01, Vol.83, p.124-138
• Main Authors: Wang, Liang, Li, Yuxuan, Liang, Meiqi, Wang, Yuanfei
• Format: Article
• Language: English
• Subjects: Lagrange function; Loan interest rate; Revenue; Risk reserve; Term structure
• ISSN: 1059-0560; 1873-8036
• DOI: 10.1016/j.iref.2022.08.016

This paper studies the portfolio strategy of P2P products based on the term structure under the risk reserve system. It constructs a Lagrange revenue function for each type of product to indicate the relationship between the optimal loan interest rate and the Lagrange revenue, and further proposes the optimal portfolio strategy model based on the term structure under the risk reserve system. A simulation analysis is carried out and the results show that. (i) Under the risk reserve system, the revenue is increasing with the loan interest rate. (ii) The optimal term will change due to the adjustment of supervision, and then the optimal portfolio will be transformed. (iii) The optimal revenue is increasing with the amount of risk reserve, and excess risk reserves will lead to an increase in the penalty cost, which makes it less likely for the platform to obtain profits from the excess. (iv) If the loan interest rate remains fixed, the cost minimization model is equivalent to the revenue maximization model, and the revenue is the largest when the total cost is minimal. (v) When the loan interest rate reaches a certain threshold, the marginal default cost will be greater than the marginal benefit, which will reduce the revenue. (vi) The differentiation of default risk with different terms will result in the change of the optimal revenue, which will cause the alteration of the optimal portfolio. •A new P2P platform portfolio strategy is proposed from the risk reserve combined with product term structure.•A Lagrange revenue model about the loan interest rate and penalty cost under the risk constraint is constructed.•When the loan interest rate reaches a certain threshold, the marginal default cost is greater than the marginal benefit.•Excess risk reserves will lead to an increase in the penalty cost, which makes it less likely for obtaining profits.