A Portfolio View of Consumer Credit

David K. Musto and Nicholas Souleles

No 11735, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: To compute risk-adjusted returns and gauge the volatility of their portfolios, lenders need to know the covariances of their loans' returns with aggregate returns. Cross-sectional differences in these covariances also provide insight into the nature of the shocks hitting different types of consumers. We use a unique panel dataset of credit bureau records to measure the 'covariance risk' of individual consumers, i.e., the covariance of their default risk with aggregate consumer default rates, and more generally to analyze the cross-sectional distribution of credit, including the effects of credit scores. We obtain two key sets of results. First, there is significant systematic heterogeneity in covariance risk across consumers with different characteristics. Consumers with high covariance risk tend to also have low credit scores (high default probabilities). Second, the amount of credit obtained by consumers significantly increases with their credit scores, and significantly decreases with their covariance risk (especially revolving credit), though the effect of covariance risk is smaller in magnitude.

JEL-codes: E21 E51 G21 (search for similar items in EconPapers)
Date: 2005-11
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
Note: AP EFG ME
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Citations: View citations in EconPapers (6)

Published as Musto, David K. and Nicholas S. Souleles. "A Portfolio View Of Consumer Credit," Journal of Monetary Economics, 2006, v53(1,Jan), 59-84.

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Journal Article: A portfolio view of consumer credit (2006)
Working Paper: A portfolio view of consumer credit (2005)
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