Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios

Think about if you are a peer lender who wants to invest money in a P2P platform, what portfolios you could choose? How to spread the risk from various loans with different credit level? Whether wealth lenders have better knowledge to hedge the risk?

Daniel Paravisini, Veronica Rappoport and Enrichetta Ravina develop a method to obtain a risk-aversion parameter from each portfolio choice. They estimate risk aversion from investors’ financial decisions using data (2007-2008) from Lending Club. Since the same individuals invest repeatedly, they construct a panel data set that they use to disentangle heterogeneity in attitudes toward risk across investors, from the elasticity of risk aversion to changes in wealth. They find that wealthier investors are more risk averse in the cross section and that investors become more risk averse after a negative housing wealth shock. Thus, investors exhibit preferences consistent with decreasing relative risk aversion and habit formation.

Further reading please see the full paper.


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