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The Risk-Taking Channel of Monetary Policy: Evidence from Individual Investors in the Peer-to-Peer Lending Market

This paper examines how monetary policy affects risk-taking and reaching-for-yield behavior of individual investors in the peer-to-peer lending market. Using data from Prosper.com from 2006 to 2013, we find that easy monetary policy, as measured by lower effective federal funds rates or the quantitative easing programs, induces individual investors to fund riskier loans and to fund loans with higher yields. We also find that loans originated during easy monetary policy regimes experience higher ex post default rates. The results suggest that the risk-taking channel of monetary policy transmission may be driven by individual behavior bias, instead of by frictions specific to financial institutions.