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

64 Pages Posted: 31 Dec 2019 Last revised: 30 Aug 2023

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

Shanghai University of Finance and Economics - School of Finance

Jan Schneemeier

Indiana University - Kelley School of Business

Zaiyan Wei

Purdue University - Daniels School of Business

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: February 22, 2023

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. Moreover, 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

Suggested Citation

Holden, Craig W. and Lin, Mingfeng and Lu, Kai and Schneemeier, Jan and Wei, Zaiyan and Yang, Jun, The Effect of Secondary Market Closure on Primary Market Liquidity: Evidence from Peer-to-Peer Lending (February 22, 2023). 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

Shanghai University of Finance and Economics - School of Finance ( email )

318 Wuchuan Rd., Wujiaochang, Yangpu District
Shanghai, Shanghai 200437
China

Jan Schneemeier

Indiana University - Kelley School of Business ( email )

1275 E 10th St
Bloomington, IN 47405
United States

HOME PAGE: http://www.jan-schneemeier.com

Zaiyan Wei (Contact Author)

Purdue University - Daniels School of Business ( email )

403 Mitch Daniels Blvd.
West Lafayette, IN 47907
United States

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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