Fed Liftoff and Subprime Loan Interest Rates: Evidence from the Peer-to-Peer Lending Market
Christoph Bertsch (),
Isaiah Hull () and
No 319, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)
On December 16th of 2015, the Fed initiated "liftoff," raising the federal funds rate range by 25 basis points and ending a 7-year regime of near-zero rates. We use a unique dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates in the peer-to-peer lending segment of the subprime market. We find that the average interest rate dropped by 16.9-22.6 basis points. This holds for 14 and 28 day windows centered around liftoff, and is robust to the inclusion of a broad set of loan-level controls and fixed effects. We also find that the spread between high and low credit rating borrowers decreased by 16% and demonstrate that this was not generated by a change in the composition of borrowers along observable dimensions. Furthermore, we find no evidence that either result was driven by a collapse in demand for funds. Our results are consistent with an investor-perceived reduction in default probabilities; and suggest that lifto provided a strong, positive signal about the future solvency of subprime borrowers, reducing their borrowing cost, even as short term rates increased in other markets.
Keywords: peer-to-peer lending; subprime consumer loans; Fed liftoff; monetary policy signaling; default channel; household debt (search for similar items in EconPapers)
JEL-codes: D14 E43 E52 G21 (search for similar items in EconPapers)
Pages: 54 pages
New Economics Papers: this item is included in nep-mac and nep-mon
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