[Literature Review] A Literature Review on How to Measure Loan Similarity
The mainstreams of research in P2P lending can be divided into credit risk, profit scoring, and portfolio optimization. The first two are pretty straightforward that credit risk is to derive the default probability of individual loans and profit scoring is to predict the expected return of individual loans. Based on the prediction, investors can identity potential low-risk and profitable loans to invest in. Some researchers also see the investment in P2P as a portfolio optimization problem. In this regard, researchers must know the return distribution of loans, i.e., the expected return AND variance of individual loans; thereby, constructing investment portfolio based on the predicted distribution. To the best of my knowledge, there are two ways to derive the return distribution of loans in the literature, instance-based credit risk assessment framework and mean-variance estimation. The mean-variance estimation appears in Babaei et al.'s paper in 2020 [1], where they use mac...