The Prosper default rate decreased in 2014

Andrey Kamenov, Ph.D. Probability and Statistics

We saw in a previous post that Lending Club default rates show relatively low correlation. That, of course, makes systematic risk assessment easier. At the same time, however, this means that geographic diversification doesn’t help investors decrease the risk of their portfolios.

We now take a look at the same chart for the Prosper default rate. Using the historical estimates for the monthly loan default rates for each of the seven Prosper borrower ratings, we project both the expected default rates and the error margin.

As you can see, the picture is relatively similar to the one observed by using the data from Lending Club; until recently, the monthly default rate has generally stayed within the confidence range constructed under the assumption of zero loan default correlation.


What is somewhat different, however, is the behavior of the default rate in the last year. Some decrease was expected due to the rapid growth in the total number of loans and the increasing share of highly-graded borrowers, but the actual decrease was even more significant.

Geographically, it appears that the difference is indeed statistically significant in most of the states (you can see the corresponding z-values in the tooltip on the map below), while some of the lowest numbers are registered in Vermont, New Hampshire and Texas.


Source: Prosper downloadable data


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About Andrey Kamenov

Andrey Kamenov, Ph.D. Probability and Statistics

Andrey Kamenov is a data scientist working for Advameg Inc. His background includes teaching statistics, stochastic processes and financial mathematics in Moscow State University and working for a hedge fund. His academic interests range from statistical data analysis to optimal stopping theory. Andrey also enjoys his hobbies of photography, reading and powerlifting.

Other posts by Andrey Kamenov:

One thought on “The Prosper default rate decreased in 2014”

  1. I’m so excited! I got a check last week for a $17. 27 from a class action settlement dating back to my group of early, original Prosper lenders who had our behinds handed to us by A-rated borrowers who would simply run off with all our money, never to be seen again, with Prosper making very lame attempt to take them to collection. That means I’m only out a couple thousand dollars instead of a couple thousand, seventeen dollars and change.

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