The cross-section of consumer lending risk

This paper tests the validity of a single-factor (market) model to price consumer lending risk. It classifies US counties into 25 portfolios based on unemployment level and the change in nominal income. The results, using serious delinquency on revolving credit as default risk, show that the interce...

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Bibliographic Details
Published in:Journal of empirical finance 2017-06, Vol.42, p.256-282
Main Author: Desai, Chintal Ajitbhai
Format: Article
Language:English
Subjects:
Consumer credit
Default
Empirical Asset pricing
Household Finance
Personal Bankruptcy
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Summary:This paper tests the validity of a single-factor (market) model to price consumer lending risk. It classifies US counties into 25 portfolios based on unemployment level and the change in nominal income. The results, using serious delinquency on revolving credit as default risk, show that the intercepts are indistinguishable from zero in 22 portfolios, and the average default rate of a portfolio increases with its beta. The additional risk factors based on unemployment and income growth portfolios marginally improve the single-factor model. The results are robust to time-varying betas and personal bankruptcy as a measure of consumer lending risk. •This paper tests the validity of a market model to price consumer lending risk.•It classifies US counties into 25 portfolios based on unemployment and income growth.•It uses serious delinquency and personal bankruptcy as measures of consumer lending risk.•The average default rate of a portfolio increases with its single-factor loading beta.•The additional risk factors based on unemployment and income growth marginally improve the single-factor model.
ISSN:0927-5398
1879-1727
DOI:10.1016/j.jempfin.2017.04.004