The Effect of Secondary Market Closure on Primary Market Liquidity: Evidence from Peer-to-Peer Lending

Abstract

Using intraday peer-to-peer issuance data, we examine the role of secondary market existence in shaping primary market liquidity. Consistent with the predictions of our theoretical framework, the closure of Prosper’s secondary market reduces its primary market liquidity, resulting in longer times to fund loans, a smaller fraction of loans funded in the first hour, and a lower percentage of loan listings ultimately funded. Furthermore, we show that primary market prices decrease for high-risk loans and increase for low-risk loans after Prosper’s secondary market is closed. We also find a positive spillover on the primary market liquidity of Prosper’s main competitor, Lending Club. Moreover, we find robust results when Lending Club unexpectedly closed its secondary market four years later. 

Keywords: Market Liquidity, Funding Time, Secondary Market, Primary Market, P2P lending

JEL Classification: G12, G23, G28