A Portfolio View of Consumer Credit / David K. Musto, Nicholas S. Souleles.

Format:

Book

Author/Creator:

Musto, David K.

Contributor:

National Bureau of Economic Research.

Souleles, Nicholas S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11735.

NBER working paper series no. w11735

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

To compute risk-adjusted returns and gauge the volatility of their portfolios, lenders need to know the covariances of their loans' returns with aggregate returns. Cross-sectional differences in these covariances also provide insight into the nature of the shocks hitting different types of consumers. We use a unique panel dataset of credit bureau records to measure the 'covariance risk' of individual consumers, i.e., the covariance of their default risk with aggregate consumer default rates, and more generally to analyze the cross-sectional distribution of credit, including the effects of credit scores. We obtain two key sets of results. First, there is significant systematic heterogeneity in covariance risk across consumers with different characteristics. Consumers with high covariance risk tend to also have low credit scores (high default probabilities). Second, the amount of credit obtained by consumers significantly increases with their credit scores, and significantly decreases with their covariance risk (especially revolving credit), though the effect of covariance risk is smaller in magnitude.

Notes:

Print version record

November 2005.