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SUMMARY:Risk-Based Pricing and Default in Subprime Credit Card Markets - D
 r Sule Alan (Faculty of Economics)
DTSTART:20110201T164500Z
DTEND:20110201T174500Z
UID:TALK29353@talks.cam.ac.uk
CONTACT:Rachel Marston
DESCRIPTION:We test the interest rate sensitivity of subprime credit card 
 borrowers using a unique panel data  set from a UK credit card company.  W
 hat is novel about our contribution is that we were given details of a ran
 domized interest rate experiment conducted by the lender between October 2
 006 and January 2007.  We find that individuals who tend to utilize their 
 credit limits fully do not reduce their demand for credit when subject to 
 increases in interest rates as high as 3 percentage points.  This finding 
 is naturally interpreted as evidence of binding liquidity constraints.  \n
 \nWe also demonstrate the importance of truly exogenous variation in inter
 est rates when estimating credit demand elasticities.  We show that estima
 ting a standard credit demand equation with nonexperimental variation lead
 s to seriously biased estimates even when conditioning on a rich set of co
 ntrols and individual fixed effects.  In particular\, this procedure  resu
 lts in a large and statistically significant 3-month elasticity of credit 
 card debt with respect to interest rates even though the experimental esti
 mate of the same elasticity is neither economically nor statistically diff
 erent from zero.\n
LOCATION:Winstanley Lecture Hall\, Trinity College
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