Private Information, Credit Risk and Graph Structure in P2P Lending Networks

A new working paper investigated the potential for improving P2P credit scoring by using “private information” about communications and travels of borrowers. The main finding is that P2P borrowers’ ego networks exhibit scale-free behavior driven by underlying preferential attachment mechanisms that connect borrowers in a fashion that can be used to predict loan profitability. 

The projection of these private networks onto networks of mobile phone communication and geographical locations from mobile phone GPS potentially give loan providers access to private information through graph and location metrics which the researchers used to predict loan profitability. Graph topology was found to be an important predictor of loan profitability, explaining over 5.5% of variability. Networks of borrower location information explain an additional 19% of the profitability. Machine learning algorithms were applied to the data set previously analyzed to develop the predictive model and resulted in a 4% reduction in mean squared error.

Full paper see Here

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