The cross-section of consumer lending risk

This paper tests the validity of a single-factor (market) model to price consumer lending risk. It classifies US counties into 25 portfolios based on unemployment level and the change in nominal income. The results, using serious delinquency on revolving credit as default risk, show that the intercepts are indistinguishable from zero in 22 portfolios, and the average default rate of a portfolio increases with its beta. The additional risk factors based on unemployment and income growth portfolios marginally improve the single-factor model. The results are robust to time-varying betas and personal bankruptcy as a measure of consumer lending risk.