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

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