One of our primary objectives in making Prosper market data fully transparent and freely available via an API is to allow and encourage anyone to study the Prosper market and consumer credit markets in general. We deeply appreciate the level of diligence and analysis so many have contributed using Prosper’s marketplace data. We are also very encouraged that an increasing number of economists and professional credit analysts have taken the time to conduct deep studies of the market and share their conclusions publicly.
One such study was released yesterday by Economists Ginger Zhe Jin and Seth Freedman of the University of Maryland. The study looks at Prosper’s market since inception to determine average returns and other interesting conclusions about the market. Among their findings:
- The average Prosper returns since inception were estimated at 6.05% with a 5.72% standard deviation and were trending up as credit quality continues to improve (see table 9 and figure 8.3).
- The highest returns were in Near Prime loans (grades B-D) at an average of 8.27%, followed by Prime loans (grades AA & A) at 6.78% and sub-prime loans at 1.73%.
- The probability of default of a Prosper loan peaks at month ten and then edges down (see Figure 9). This is a major reason why Prosper’s performance tool shows more conservative returns. Prosper’s performance tool does not adjust for this later default moderation, which is significant given that the average age of the Prosper portfolio is currently 9.7 months (i.e. at the peak of the default curve).
- The study showed that the highest returns occurred for loans priced up to 25%. Loans funded at more than 25% actually showed lower returns because defaults increased disproportionately. This implies that borrowers willing to pay very high rates show higher adverse selection, which is logical (see Figure 8.1).
- The study found that lenders learn quickly – adjusting their bids and strategies as performance is revealed. New lenders also learn from their observations of earlier lenders in adjusting to marketplace dynamics.