The Effect of Secondary Market Existence on Primary Market Liquidity: Theory and Evidence from a Natural Experiment in Peer-to-Peer Lending

47 Pages Posted: 31 Dec 2019 Last revised: 7 Apr 2020

See all articles by Craig W. Holden

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Mingfeng Lin

Scheller College of Business, Georgia Institute of Technology

Kai Lu

University of Science and Technology of China - International Institute of Finance, School of Management

Zaiyan Wei

Purdue University - Krannert School of Management

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: April 2020

Abstract

We derive the theoretical result that the existence of a secondary market increases primary market liquidity in the form of lower effective spreads and higher issuance quantities. The same intuition suggests a shorter funding time. Using intraday peer-to-peer issuance data, we find that the closure of Prosper’s secondary market reduces its primary market liquidity, including longer times to fund loans both by individuals and by institutions, higher origination fee to fund loans by individuals, and a lower percentage of loan listings are funded by both individuals and institutions. We also find a positive spillover on its competitor’s primary market liquidity.

Keywords: Liquidity Premium, Secondary Market, Primary Market, P2P Lending

JEL Classification: G12, G23

Suggested Citation

Holden, Craig W. and Lin, Mingfeng and Lu, Kai and Wei, Zaiyan and Yang, Jun, The Effect of Secondary Market Existence on Primary Market Liquidity: Theory and Evidence from a Natural Experiment in Peer-to-Peer Lending (April 2020). Available at SSRN: https://ssrn.com/abstract=3502006 or http://dx.doi.org/10.2139/ssrn.3502006

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

Mingfeng Lin

Scheller College of Business, Georgia Institute of Technology ( email )

United States

Kai Lu

University of Science and Technology of China - International Institute of Finance, School of Management ( email )

96 JinZhai Rd
Hefei, Anhui 230026
China

Zaiyan Wei (Contact Author)

Purdue University - Krannert School of Management ( email )

100 Grant St
West Lafayette, IN 47907-2076
United States
(765) 494-5958 (Phone)

Jun Yang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

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