Date of this Version
Journal of Monetary Economics
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. We use unique credit bureau data to measure individuals’ ‘covariance risk’, i.e., the covariance of their default risk with aggregate consumer default rates, and more generally to analyze the distribution of credit, including the effects of credit scores. We find significant heterogeneity in covariance risk across consumers. Also, the amount of credit they obtain significantly increases with their credit scores, and decreases with their covariance risk (especially revolving credit), though the effect of covariance risk is smaller.
© 2006. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.
Musto, D. K., & Souleles, N. S. (2006). A Portfolio View of Consumer Credit. Journal of Monetary Economics, 53 (1), 59-84. http://dx.doi.org/10.1016/j.jmoneco.2005.10.009
Date Posted: 27 November 2017
This document has been peer reviewed.