The Co-holding Puzzle: New Evidence from Transaction-Level Data John Gathergood 1 & Arna Olafsson 2 1 University of Nottingham 2 Copenhagen Business School & CEPR October 2020 1/56
Overview Introduction 1 Data 2 Results I: Measuring Co-holding 3 4 Results II: Determinants of Co-holding 5 Conclusion 2/56
Overview Introduction 1 Data 2 Results I: Measuring Co-holding 3 Results II: Determinants of Co-holding 4 Conclusion 5 3/56
Introduction Individuals exhibit financial behaviours that appear inconsistent with models of rational, or quasi-rational, behaviour, e.g., Failure to refinance (Andersen et al., 2019) Choosing dominated insurance options (Bhargava et al., 2017) Making dominated debt repayment choices (Gathergood et al., 2019) Understanding such violations is important for realistic models of consumer behaviour and for policy One of the starkest violations of rationality is holding liquid high-cost debt and liquid low-yield assets simultaneously The “credit card puzzle” or “co-holding puzzle” (Morrison, 1998; Gross and Souleles, 2002) 4/56
Co-holding Puzzle Co-holding puzzle has been documented in many settings (mostly using survey data), with a variety of explanations offered Cash liquidity management (Telyukova & Wright, 2008; Telyukova, 2013) Credit limit risk (Druedahl & Jorgensen, 2018; Gorbachev & Luengo-Prado, 2019) Within-household coordination (Bertaut et al., 2009; Vihriala, 2019) Noncognitive ability (Choi & Laschever, 2018) Self-control (Bertaut et al., 2009; Gathergood & Weber, 2014) 5/56
This Paper We present new evidence on co-holding from transaction level data Use daily, transaction-level data from Icelandic financial aggregator which provides objective measure of financial balances Study co-holding of liquid cash deposits together with liquid bank overdrafts, the most common means of borrowing in Iceland I In Iceland consumers commonly hold multiple deposit accounts as a means of borrowing via overdrafts I Aggregate overdraft debt is twice the value of rolling credit card debt in Iceland, with credit cards typically used for transacting only whereas overdrafts are used for borrowing (Carlin et al., 2017) This form of co-holding is i) fully liquid, ii) immediately costly, iii) costly with certainty at time of transaction I Cleaner setting compared with studying credit cards 6/56
Results Coholding is uncommon and typically short-lived 15% of individual × days exhibit non-zero co-holding Most co-holding is of less than 15 days worth of consumption Duration of co-holding spells are typically short We examine explanations from existing literature Institutional setting rules-out cash management and credit limit management as a plausible explanation Co-holding is only slightly higher among households than individuals Evidence suggests limited attention does not explain co-holding I Positive relationship between level and duration of co-holding I Co-holding is more likely on days when individuals pay attention to their accounts (measured by logins) 7/56
Results Our results suggest co-holding may arise due to mental accounting Individuals might co-hold through a desire to separate their financial assets from their short-term consumption (Thaler, 1985) We find that the likelihood of coholding increases with share of non-durable expenditure Likelihood increases with share of spending on gambling and temptation goods (consistent with Bertaut et al, 2009; Gathergood and Weber, 2014) Coholding decreases on payday as overdraft “spending” account is replenished by income receipt Indicates individuals may run short-term “spending” (overdraft) and “savings” (deposits) accounts concurrently 8/56
Overview Introduction 1 Data 2 Results I: Measuring Co-holding 3 Results II: Determinants of Co-holding 4 Conclusion 5 9/56
Overview Introduction 1 Data 2 Results I: Measuring Co-holding 3 Results II: Determinants of Co-holding 4 Conclusion 5 10/56
Data Financial aggregator data provided by Meniga Serves approximately 20% of the Icelandic adult population Meniga scrapes transaction-line level data from financial providers and creates a view of accounts on its platform One-time sign-up allows Meniga to scrape data on an ongoing basis Objective transaction records, avoiding non-response or self-report I Used in previous studies of individual and household financial decisions (Olafsson and Pagel 2017, 2018a, 2018b; Carvalho et al., 2019) Data covers period 1 Sept 2014 - 31 Jan 2017 We analyse data at the individual × day level 11/56
Sample Selection Steps in sample selection Starting sample of 53,300 individuals Sample restrictions I At least one deposit account and one overdraft line I Minimum of one monthly income receipt I Minimum level of basic transactions (5 in each of 23/24 months) I Available demographic information (age, sex, postal code) Resulting sample of 11,551 individuals and 10.2 million individual × day observations 12/56
Measurement Co-holding calculation Two components: cash deposit balances and overdraft balances I On average, 13pp margin between credit interest rates paid on balances and overdraft interest rates charged on balances I Both are fully liquid, can be drawn-down / paid-down instantly I Overdraft balances incur interest on a daily basis Co-holding is therefore the minima of on-the-day cash deposit balances and (absolute) value of overdraft balances Calculate co-holding for each individual × day observation 13/56
Measurement Co-holding calculation Calculate an economically meaningful measure of co-holding Scale co-holding (in currency units) by permanent income Consumption value of co-holding differs across households in line with their permanent income I For high income households a given monetary amount of co-holding i) is worth less in consumption, ii) has shorter implied duration Use average daily expenditure over sample period as proxy for permanent income I Resulting measure of “consumption-days” of co-holding Also show results for co-holding in monetary units 14/56
Overview Introduction 1 Data 2 Results I: Measuring Co-holding 3 Results II: Determinants of Co-holding 4 Conclusion 5 15/56
Overview Introduction 1 Data 2 Results I: Measuring Co-holding 3 Results II: Determinants of Co-holding 4 Conclusion 5 16/56
Measuring Co-holding Figure: Overdraft Balances 17/56
Measuring Co-holding Figure: Cash Deposit Balances 18/56
Measuring Co-holding Figure: Overdrafts vs. Cash Deposit Balances 19/56
Measuring Co-holding Table: Co-holding in Consumption-Days Cash holdings Overdraft holdings 0 > 0-10 > 10-20 > 20-30 > 30 Total 0 2.95 15.65 6.79 4.88 35.47 65.73 > 0-10 1.65 1.27 0.19 0.10 0.63 3.83 > 10-20 1.23 1.12 0.15 0.07 0.35 2.93 > 20-30 1.16 1.04 0.14 0.07 0.28 2.70 > 30 11.50 9.90 1.02 0.55 1.83 24.81 Total 18.50 28.98 8.29 5.67 38.56 100.00 20/56
Measuring Co-holding Summary statistics for co-holding 85% of observations have zero co-holding I 65.7% have overdraft balance equal to zero I 18.5% have cash deposit balance equal to zero I 2.9% have both balances equal to zero 15% of observations have non-zero coholding. Among which: I 12.3% co-hold over 30 days of overdraft alongside some cash holdings I But only 1.8% co-hold over 30 days of overdraft and cash balances I 7.5% co-hold more than ISK20,000 / $200 I But only 4% co-hold more than $800 21/56
Measuring Co-holding Table: Co-holding in Monetary Amounts Cash Overdraft 0 > 0-20,000 > 20,000-40,000 > 40,000-60,000 > 60,000-80,000 > 80,000 Total 0 2.95 8.82 3.76 2.92 2.40 44.87 65.73 > 0-20,000 0.60 0.38 0.05 0.03 0.03 0.35 1.43 > 20,000-40,000 0.45 0.30 0.04 0.03 0.02 0.23 1.08 > 40,000-60,000 0.41 0.31 0.05 0.02 0.03 0.20 1.01 > 60,000-80,000 0.39 0.26 0.04 0.02 0.02 0.17 0.90 > 80,000 13.70 9.57 1.22 0.79 0.57 4.00 29.84 Total 18.50 19.64 5.15 3.81 3.07 49.83 100.00 22/56
Individual-Level Persistence Summarize co-holding at the individual level Define “co-holder” by at least 1 consumption-day for at least 1 day of the data period. 60% of individuals never co-hold, of the 40%: 1 The fraction of days on which individuals co-hold is typically very low I 50% co-hold on fewer than 10% of the days in the sample period I Only 15% co-hold on more than half of the days in the sample period 2 The share of days on which individuals co-hold many days of consumption is typically very low I On average, co-holders hold in excess of 30 consumption-days of deposit balances and overdrafts on only 11% of their co-holding days 3 There is an inverse relationship between duration of coholding and number of coholding spells 23/56
Individual-Level Persistence Figure: Share of Days Co-holding 24/56
Individual-Level Persistence Table: Share of Co-holding Days Mean SD p50 p75 p90 p95 Min(3,3) 0.216 0.255 0.109 0.325 0.636 0.808 Min(5,5) 0.196 0.242 0.090 0.283 0.588 0.765 Min(10,10) 0.165 0.220 0.064 0.226 0.492 0.699 Min(15,15) 0.146 0.207 0.051 0.195 0.441 0.637 Min(20,20) 0.134 0.197 0.043 0.176 0.419 0.596 Min(25,25) 0.124 0.190 0.037 0.155 0.394 0.566 Min(30,30) 0.117 0.182 0.036 0.143 0.369 0.514 25/56
Individual-Level Persistence Figure: Duration of Co-holding Spells 26/56
Individual-Level Persistence Figure: Co-holding Spell Length vs. Frequency 27/56
Individual-Level Persistence Table: Duration of Co-holding Spells Duration of Co-holding (#days) Mean SD P50 P75 P90 P95 #obs Individual x day level 22.5 52.5 9.0 23.0 43.0 85.0 33,841 Individual level 29.6 61.4 13.0 27.6 65.5 112.2 3,985 28/56
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