TY  - JOUR
AU  - Musto,David K.
AU  - Souleles,Nicholas S.
TI  - A Portfolio View of Consumer Credit
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11735
PY  - 2005
Y2  - November 2005
UR  - http://www.nber.org/papers/w11735
L1  - http://www.nber.org/papers/w11735.pdf
N1  - Author contact info:
David Musto
Finance Department
Wharton School
University of Pennsylvania
3620 Locust Walk  2323 SH-DH/6367
Philadelphia, PA 19104-6367
Tel: 215/898-4239
E-Mail: musto@wharton.upenn.edu

Nicholas S. Souleles
Finance Department
The Wharton School
2300 SH-DH
University of Pennsylvania
Philadelphia, PA  19104-6367
Tel: 215/898-9466
Fax: 215/898-6200
E-Mail: souleles@wharton.upenn.edu
AB  - To compute risk-adjusted returns and gauge the volatility of their portfolios, lenders need to know the covariances of their loans' returns with aggregate returns. Cross-sectional differences in these covariances also provide insight into the nature of the shocks hitting different types of consumers. We use a unique panel dataset of credit bureau records to measure the 'covariance risk' of individual consumers, i.e., the covariance of their default risk with aggregate consumer default rates, and more generally to analyze the cross-sectional distribution of credit, including the effects of credit scores. We obtain two key sets of results. First, there is significant systematic heterogeneity in covariance risk across consumers with different characteristics. Consumers with high covariance risk tend to also have low credit scores (high default probabilities). Second, the amount of credit obtained by consumers significantly increases with their credit scores, and significantly decreases with their covariance risk (especially revolving credit), though the effect of covariance risk is smaller in magnitude.
ER  -