The Leibniz Institute for Financial Research SAFE organizes and cordially invites you to attend the next
SAFE Digital Finance Seminar
Gaining a Seat at the Table: Enhancing the Attractiveness of Online Lending for Institutional Investors (Information Systems Research, Forthcoming)
Ram Gopal, Professor of Information Systems Management, University of Warwick
to be held on 25 September, 4:00 p.m. - 5:00 p.m. CET, via Zoom
Abstract: Although online lending enjoyed explosive growth in the past decade, its market size remains small compared with other financial assets. The risk of losing money, stringent government regulations, and low awareness of the benefits have hampered the realization of the full potential of the online lending market. Because online loans are an emerging asset class, investors may not be aware of the investment performance of online loans compared with other assets, and it remains an open question whether online loans offer sufficiently attractive returns to warrant inclusion in an asset allocation decision.
To attract lenders, platforms must provide an appealing investment opportunity which entails construction of portfolios of loans that investors find attractive. We propose general characteristics-based portfolio policy (GCPP), a novel framework to overcome the difficulties associated with portfolio construction of loans. GCPP directly models the portfolio weight of a loan as a flexible function of its characteristics and does not require direct estimation of the distributional properties of loans. Using an extensive data set spanning over one million loans from 2013 to 2020 from LendingClub, we show that GCPP portfolios can achieve an average annualized internal rate of return (IRR) of 8.86%–13.08%, significantly outperforming an equal-weight portfolio of loans. We then address the question of whether online loans can earn competitive rates of return compared with traditional investment vehicles through six market indices covering stocks, bonds, and real estate.
The results demonstrate that a portfolio of online loans earns competitive or higher rates of return compared with traditional asset classes. Furthermore, the IRRs of the loan portfolios have small correlations with the benchmark index IRRs, pointing toward significant diversification benefits. Together, we demonstrate that GCPP is an approach that can help platforms better serve both borrowers and lenders en route to growing their business.
Ram D. Gopal is the Information Systems Society's Distinguished Fellow and a Professor of Information Systems and Management at the Warwick Business School. He previously served as the Head of the Department of Operations and Information Management in the School of Business, University of Connecticut from 2008-2018. As the Department Head, he initiated a new Master of Science degree program in Business Analytics and Project Management in 2011 and an undergraduate business major in Business Data Analytics in 2014.
He has a diverse and a rich portfolio of research that spans big data analytics, health informatics, financial technologies, information security, privacy and valuation, intellectual property rights, online market design and business impacts of technology. His research has appeared in Management Science, Management Information Systems Quarterly, Operations Research, INFORMS Journal on Computing, Information Systems Research, Journal of Business, Journal of Law and Economics, Communications of the ACM, IEEE Transactions on Knowledge and Data Engineering, Journal of Management Information Systems, Decision Support Systems, and other journals and conference proceedings. He is currently a Senior Editor of Information Systems Research and has held editorial positions at Decision Sciences, Journal of Database Management, Information Systems Frontiers, and Journal of Management Sciences. He served as the President of the Workshop on Information Technologies and Systems organization from 2016 to 2018.
