On the Convergence of Credit Risk in Current Consumer Automobile Loans

62 Pages Posted: 5 Dec 2022

See all articles by Jackson P. Lautier

Jackson P. Lautier

University of Connecticut - Department of Statistics

Vladimir Pozdnyakov

University of Connecticut - Department of Statistics

Jun Yan

University of Connecticut - Department of Statistics

Date Written: November 16, 2022

Abstract

Risk-based pricing of loans is well-accepted. Left unstudied, however, is the conditional credit risk of a loan that remains current. Using large-sample statistics and asset-level consumer automobile asset-backed security data, we find that default risk conditional on survival converges for borrowers in disparate credit risk bands well before scheduled termination, a phenomenon we call credit risk convergence. We then use actuarial techniques to derive the conditional market-implied credit spread by credit risk band to estimate current deep subprime and subprime borrowers eventually overpay by annual percentage rates of 285-1,391 basis points. Our results are robust to various sensitivity tests.

Keywords: Adjustable premium loans, asset-level disclosures, competing risks, Coronavirus, COVID-19, economic inequality, financial literacy, market inefficiency, Reg AB II

JEL Classification: C58, D11, D12, D18, D53, G14, G32, G53, P46

Suggested Citation

Lautier, Jackson and Pozdnyakov, Vladimir and Yan, Jun, On the Convergence of Credit Risk in Current Consumer Automobile Loans (November 16, 2022). Available at SSRN: https://ssrn.com/abstract=4278917 or http://dx.doi.org/10.2139/ssrn.4278917

Jackson Lautier (Contact Author)

University of Connecticut - Department of Statistics ( email )

Room 323, Philip E. Austin Building
215 Glenbrook Rd. U-4120
Storrs, CT 06269-4120
United States

Vladimir Pozdnyakov

University of Connecticut - Department of Statistics

Jun Yan

University of Connecticut - Department of Statistics ( email )

Room 323, Philip E. Austin Building
215 Glenbrook Rd. U-4120
Storrs, CT 06269-4120
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
10
Abstract Views
124
PlumX Metrics