Herding in a P2P lending market: Rational inference or irrational trust?

Herding behaviour-which originates from the phenomenon of animals moving and foraging in a group-has been widely explored in financial markets, especially stock markets. In previous post, we reviewed a rational herding paper in US P2P market. Compared to traditional lending institutions, lenders in P2P lending markets are retail investors who are difficult to acquire sufficient information for their decisions. Zhang and Liu (2012) find that well-funded loan requests tend to attract more funding, lenders can review creditworthiness of borrowers by observing peer lending decisions and use publicly observable borrower characteristics to moderate their inferences.

Using data from Renrendai.com, Zhang and Chen (2017) examine the dynamic relationship between prior cumulative bids and current bids. The main finding is that lenders appear to imitate each other’s behaviour and herd in the P2P lending market funding percentage and time-limit effects are controlled for. They then test the classification of herding in the P2P lending market by dividing the bids into manual and automated bids.The empirical evidence shows the existence of both rational and irrational herding in the P2P lending market.

Full paper please see Here.

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