Industrial Marketing Management xxx (xxxx) xxx–xxx

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Industrial Marketing Management

journal homepage: www.elsevier.com/locate/indmarman

Research paper

Uncertainty in financing interest rates for startups

Bing Xu, Shenghong Zhang, Xiaohui Chen
⁎

Research Institute of Quantitative Economics, Zhejiang Gongshang University, Hangzhou, China

ARTICLE INFO ABSTRACT

Keywords: The difficulty for startups to secure financing is an important issue in relation to the economic progress of
Startups developing countries. As the main financing channel for startups, informal financing is a popular topic in the-
Informal financing oretical and practical circles. Using data on 113,656 loans to startups in Wenzhou, China, from 2016 to 2018,
Financing rate this paper measures the uncertainty of financing rates. The results show that from the perspective of fund
Uncertainty
suppliers, micro-loan company lending is more uncertain than direct social lending. From the perspective of
financing methods, the uncertainty of contract loans is greater than the uncertainty of credit loans and is rising
year on year. From the perspective of the financing period, great uncertainties occur in short-term loans of one
month and long-term loans of one year or more. These results provide empirical support for policy decisions to
regulate micro-loan companies, establish the spirit of contract, and increase capital liquidity.

1. Introduction
The difficulty and high cost of financing for startups has always
been an important issue in economic development. In some developing
countries, informal financing has become the preferred channel for
startup financing due to the lack of venture capital firms. It is difficult
for startups to establish and develop without the support of informal
financing. Informal financing occurs without a formal financial inter-
mediary between suppliers and borrowers. In empirical studies, in-
formal financing often includes, but is not restricted to, trade credit,
interpersonal borrowing (money from friends or family), private money
houses, pawnshops, and community cooperatives (Franklin, Meijun, &
Jing, 2019). Informal financing provides funds for startups. Formal
lending is less flexible and applicable than informal financing with a
market-oriented financing rate, which better meets the needs of the
development of startups. However, the price of informal financing is 3
times that of borrowing from formal financial institutions such as
banks. The informal financing of startups in Wenzhou, China, is a ty-
pical example within the Chinese economy. According to the website of
Wenzhou Financial Office, the comprehensive annual financing rate of
the “Wenzhou Index” is about 16.45%, and the annual financing rates
of small, medium, and large loans are 15.11%, 16.85% and 19.74%
respectively. However, high financing rates of informal financing are
accompanied by high volatility.
Entrepreneurship is an emerging field of research that has received
special attention in recent decades. This research interest shows that
scholars of entrepreneurial phenomena and everything encapsulated
therein are far from reaching a consensus (Ferreira, Fernandes, & Kraus,
2019). The difficulty and cost of financing is regarded as a vital problem
for startups, which are crucial for the economic growth and innova-
tiveness of regions and nations. From the perspective of the relationship
between startups and the owners of capital, the information asymmetry
and the consequential conflict of interest between the principal and the
agent can prevent a financing relationship. New venture founders have
never been entrepreneurs before, which makes it difficult for capital
holders to assess their industry and management knowledge as well as
their moral character (Mitter & Kraus, 2011). The second fundamental
problem concerning entrepreneurial finance is moral hazard. Once new
venture founders have raised funds, they may misallocate these funds
by using them in a way that benefits themselves (Denis, 2004). In sum,
it is difficult for startups to obtain capital from formal institution such
as banks. To match the risks of startup financing, informal financing is
often accompanied by high financing rates. Because informal financing
borrowers and lenders have a mixed profile, the financing rates of in-
formal financing involve high uncertainty.
Startups also play a key role in the commercialization of new ideas
emerging from academic research and in the exploitation of knowledge
spillovers from industry (Baraldi, Havenvid, Linné, & Öberg, 2018).
Important lines of research for academia are understanding how to
provide a healthy environment for the development of startups and
knowing what constraints limit this development. First, the develop-
ment of startups depends heavily on their social network. Brown,
Mawson, and Rowe (2018) analyzed entrepreneurial networks and
found that startups leverage, build on, and draw upon a complex array

⁎
Corresponding author at: Zhejiang Gongshang University, No.18, Xuezheng Str., Xiasha University Town, China.
E-mail addresses: bingxu0@aliyun.com (B. Xu), sh_h_zhang@163.com (S. Zhang), 17826851246@163.com (X. Chen).

https://doi.org/10.1016/j.indmarman.2020.02.026
Received 21 September 2019; Received in revised form 27 February 2020; Accepted 27 February 2020
0019-8501/ © 2020 Elsevier Inc. All rights reserved.

Please cite this article as: Bing Xu, Shenghong Zhang and Xiaohui Chen, Industrial Marketing Management,
https://doi.org/10.1016/j.indmarman.2020.02.026
B. Xu, et al.
of network actors and ties, which confer important relational benefits to
recipients that amount to more than money. The sources of investment
in entrepreneurial areas in counties and municipalities depend heavily
on development levels (Roberta & Alen, 2018). Network capability
development is important for new ventures to acquire and mobilize
external resources and engage in interactive networked activities
(O'Toole & Mcgrath, 2017). Second, factors of production place a major
restriction on the growth of startups. Countries that lack a highly
educated population may not be at a particular disadvantage regarding
entrepreneurial activities. The facilitation of entrepreneurial social ca-
pital should be more successful if agencies filter their assistance
through existing social networks (Davidsson & Honig, 2003). The per-
formance of new ventures is based on factors that can be observed at
the time of founding (Cooper, Gimeno-Gascon, & Woo, 1994). Finally,
other important factors influence the development of startups. Some
cultural configurations nurture entrepreneurial startups, whereas other
cultures are biased toward thwarting startups (Woodside, Bernal, &
Coduras, 2016). Because startups usually struggle with a lack of re-
sources and the team has multiple attention demands, proposing busi-
ness intelligence practices might payoff (Caseiro & Coelho, 2019).
Bhalla and Terjesen (2013) found that new firms outsourcing to sup-
pliers at the network periphery are more likely to achieve cost effi-
ciencies yet expose themselves to opportunism, uncertainty, and high
levels of relationship-specific investments but low levels of operational
knowledge. Camisón-Haba, Clemente-Almendros, and Gonzalez-Cruz
(2019) found that the probability of a technology-based firm becoming
a technology-based and highly innovative firm is greater when firms are
able to accumulate a high endowment of knowledge and technological
capabilities and have a management team with experience, a strong
power position, and a technical or managerial education background.
Entrepreneurial orientation has a leveraging effect on export perfor-
mance (Monteiro, Soares, & Rua, 2019). Startup financing is an im-
portant source of capital, but few studies directly focus on the financing
process of startups.
In terms of factors that influence financing rates, studies have
shown that financing rates are related to regional economic levels. The
term structure of financing rates for private financing is different from
that for banks. Ding and Qiu (2012) noted that the term structure of
financing rates follows various curves such as an increasing shape, a U
shape, an inverted U shape, and a wave shape. Long-term financing
rates are lower than short-term financing rates. This phenomenon,
which is difficult to explain using common sense, is often called the
mystery of the term structure of financing rates for private lending.
Gietzen (2017) found that the microfinance industry faces the least li-
quidity risk, high financing rate risk, and in most cases, low foreign
exchange risk. Linking risk exposure to institutional characteristics, the
data show that legal status and regional affiliation are related to risk.
Quantitative analysis of the risks and uncertainties in the volatility of
financing rates is of practical significance. Luo (2017) proposed a rea-
sonable risk control mechanism, which is of great significance for ac-
celerating the regularization of private financing, activating private
capital, and controlling financial risks. High financing rates, if the only
risk, can be assessed with probability. Thus, high financing rates are not
so problematic because people always try to control risk.
Uncertainty about financing rates is difficult to control because it is
difficult to calculate the probability of uncertainty. Uncertainty mea-
surement has been paid more and more attention by scholars.
Researcher have described uncertainty as the fact that “people cannot
predict the likelihood of future events happening” (Frank, 1921, p.
198). Regarding economic uncertainty, especially its measurement,
Bloom (2009) treated the stock market volatility sequence as a proxy
for economic uncertainty, whereas Caggiano, Castelnuovo, and
Groshenny (2014) used the Chicago Board Options Exchange Volatility
Index (VIX Index) as a proxy for economic uncertainty. Based on the big
data approach, many researchers have used Internet search data to
measure economic uncertainty. Baker, Bloom, and Davis (2013)
2
Industrial Marketing Management xxx (xxxx) xxx–xxx
proposed using the frequency of articles containing the words “eco-
nomic policy uncertainty” to measure economic uncertainty. (Li, F.& Li,
G., 2017) proposed a search and prediction algorithm that auto-
matically mines the relationship between the Baidu search query index
and economic indicators and selects representative query data to pre-
dict economic indicators. Wang and Song (2014) used the conditional
variance of China's quarterly real GDP change rate to characterize
China's macroeconomic uncertainty and studied the relationship be-
tween macroeconomic uncertainty, capital demand, and corporate in-
vestment. Aruoba, Diebold, and Scotti (2009) constructed a model
based on the Kalman filter algorithm to measure economic uncertainty
using stock market indicators and macroeconomic indicators with dif-
ferent prediction periods. (Sheen & Wang, 2017) also adopted a Kalman
filter algorithm based on state space for mixed frequencies to estimate
economic uncertainty.
Informal financing for startups is difficult because financing is ex-
pensive, which is reflected in high financing rates. Current research on
informal financing rates predominantly examines the interactions be-
tween macroeconomics, policies, and formal financing rates. However,
scant research has examined informal financing rates, and much less
measured their uncertainty. This paper studies the uncertainty of vo-
latility in informal financing interest rates of startups from the per-
spective of informal financing institutions, lending terms, and lending
methods. This paper attempts to provide policy guidance for the gov-
ernment to solve the financing difficulties of startup financing.
This paper does not study the phenomena of financing rates and
financing scale for startups. Instead, it examines the risk of financing
rate volatility, especially the uncertainty of financing rate volatility.
This paper explores the uncertainty of financing rate volatility for dif-
ferent fund suppliers, financing methods, and financing periods. Does
uncertainty mainly occur in micro-loan company lending or in direct
social lending? Is uncertainty due to contract lending or credit lending?
Does uncertainty occur in short-term loans within a year or long-term
loans over a year? These are the questions addressed in this paper.
The remainder of this article is organized as follows. The second
section focuses on informal financing description statistics. The third
section describes the measurement method for uncertainty. The results
of the empirical study of financing rate uncertainty are discussed in the
fourth section. The fifth section presents the conclusions and policy
implications of the study.
2. Descriptive statistics of informal financing
The Wenzhou Private Lending Index has nearly 400 inspection sites
covering more than 20 provinces in China. This study explicitly spe-
cifies informal financing as operating within social or business networks
in the absence of a formal financial intermediary. The study is con-
ducted from the perspective of the fund supplier, including direct social
lending and micro-loan company lending. Direct social lending is in-
terpersonal borrowing. Micro-loan company lending refers to loans
from micro-loan companies, which are not classified as banks because
they cannot take deposits. The total scale of informal financing in
Wenzhou between 2016 and 2018 is shown in Table 1. The scale of
lending by micro-loan companies is 3 times that of direct social lending.
The financing rate can be divided into six levels: 0–5%, 6%–10%,
11%–15%, 16%–20%, 21%–25%, and 25% or more. Table 2 shows that
Table 1
Wenzhou informal financing for 2016–2018 (Unit: 10,000 yuan).
Year Direct social lending Micro-loan company lending Total
2016 528,342.95 1,576,913.11 2,105,256.06
2017 471,066.41 1,122,765.61 1,593,832.02
2018 470,086.95 1,177,726.71 1,647,813.66
Total 1,469,496.31 3,877,405.43 5,346,901.74
B. Xu, et al. Industrial Marketing Management xxx (xxxx) xxx–xxx

Table 2
Wenzhou informal financing rates for 2016–2018.
Financing rate (%) Direct social lending Micro-loan company lending Total

Number of loan transactions Proportion Number of loan transactions Proportion Number of loan transactions Proportion

0–5 6 0.01% 167 0.28% 173 0.15%

6–10 3815 7.06% 3613 6.06% 7428 6.54%
11–15 36,191 66.97% 9890 16.59% 46,081 40.54%
16–20 11,153 20.64% 30,992 51.99% 42,145 37.08%
21–25 2314 4.28% 14,952 25.08% 17,266 15.19%
> 25 561 1.04% 1 0.00% 562 0.50%
Total 54,040 100.00% 59,615 100.00% 11,3655 100.00%

between 2016 and 2018, the most common financing rate among financing in Wenzhou was mainly for small and micro enterprises. A
Wenzhou informal financing was 11% to 20%, accounting for 77.62% large proportion of lending was used for the capital turnover of en-
of the total. Only 6.69% of loans had rates below 10%, and 15.69% of terprises. The loans for capital turnover accounted for the largest pro-
the loans had a financing rate of more than 20%. The central bank's portion, and the funds for informal lending by startups were mostly
benchmark financing rate was only 4.90%, while commercial banks' short-term loans because it is hard for these ventures to borrow long-
financing rates were generally below 10%. Thus, the financing rates of term funds.
informal financing were generally higher than those of formal finan-
cing, which reflects the problem of expensive financing for startups and 3. Uncertainty measurement method
highlights the reasons for financing difficulties. From the perspective of
direct social lending rates and micro-loan company lending rates, the For the measurement of the risk and uncertainty of informal fi-
most common single financing rate of direct social lending was con- nancing rates, this paper draws on the construction of the uncertainty
centrated between 11% and 15%, while the most common financing index by Chuliá, Guillén, and Uribe (2017), which consists of two steps:
rate of micro-loan companies was concentrated between 16% and 20%. 1) separating trends and deriving risks and 2) removing risk and cal-
The proportion of financing rates below 10% for direct social lending culating uncertainty. The first step is to isolate the trend components of
was similar to that for micro-loan company lending. However, the the financing rate sequence and calculate the risk. In this paper, the
percentage of direct social lending with a financing rate of more than optimized moving average model of Aistis and Židrina (2018) is used to
20% was 5.32%, whereas the percentage of micro-loan company calculate the trend components and obtain the risk and residuals. The
lending at a similar rate was 25.08%. second step uses Markov chain Monte Carlo (MCMC) methods to cal-
The use of informal financing is diverse and involves the con- culate the volatility of each residual in the previous step and calculate
sumption of individuals and households, the input of various produc- the uncertainty. The specific calculation method is described in detail
tion activities such as agriculture, forestry, animal husbandry, and below.
fishery, the purchase of raw materials, the construction of industrial
plants, and the turnover of funds. The categories of financing purposes 3.1. Risk measurement
shown in Table 3 are broadly classified according to these keywords.
The category “Other” refers to any purposes other than those stated Moving averages (MAs) are often used to smooth and remove noise
above. The financing purpose of raw material purchasing is separate in time series data (Fiedor, 2014; Sakalauskienė, 2003) such as stock
from that of investment production and operation because the financing price series. It is often for the purpose of predicting trend direction.
amount and the scale of raw material purchasing are large. The sta- Aistis and Židrina (2018) proposed an optimized custom moving
tistical results show that informal financing for households and in- average method, which is determined by a combination of accuracy and
dividual consumption amounted to less than 1% of the total. Only smoothness. For a given time series c = {ct}, t = 1, 2, …, T, the
2.86% corresponded to agriculture and aquaculture, and 67.15% cor- weighted moving average at time t is:
responded to capital turnover. A total of 19.99% corresponded to the n n
purpose of production, operation, and investment (including material matn = ct i + 1 wi = Cin W T , t = 1, 2, …, T , wi = 1 (1)
i=1 i=1
procurement). In terms of fund suppliers, the relative amount of lending
Here, t is the length of the time series, n is the number of moving
for each purpose was the same, but the loan scale of direct social
averages, Cin = (ci, ci−1, …, ci−n+1), W = (w1, w2, …, wn) is the weight,
lending for the purpose of capital turnover was much smaller, and the
and the moving average sequence is man = {matn} , t = 1, 2, …, T. The
proportion of loans for material procurement was much larger. Informal
average accuracy is defined as the difference between the current value
and the moving average at that point. The average accuracy expression
is
Table 3
Uses of Wenzhou private financing for 2016–2018. n 1 p
acc ma = |ct matn|
p t=1 (2)
Financing use Direct social Micro-loan Total
lending company lending Here, p is the time series length, and n is a moving average period. The
Personal household 1.24% 0.06% 0.39%
smaller the accuracy values are, the better it is. The other comparative
consumption measure is smoothness, which indicates how smooth the moving
Primary industry 3.28% 2.70% 2.86% average is and how much it changes direction. Smaller smoothness
Capital turnover 43.05% 76.29% 67.15% values are better. The expression is
Purchase of raw materials 26.41% 6.12% 11.70%
Investment production and 8.41% 8.25% 8.29% n 1 p
smoma = |(matn matn 1) (matn 1 matn 2)|
operation p t=3
Other 17.61% 6.58% 9.61% 1 p
Total 100.00% 100.00% 100.00% = |matn 2matn 1 + matn 2|
p t=3
(3)

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B. Xu, et al. Industrial Marketing Management xxx (xxxx) xxx–xxx

A moving average that combines smoothness and accuracy is a etu = e ht /2 t , t ~N (0, 1) ht = µ + (ht 1 µ) + t, t ~N (0, 2)
(10)
novel idea. Compared with the moving average put forward by Raudys,
Here, εt is the standard normally distributed white noise interference, ht
Lenčiauskas, and Malčius (2013), the proposal by Aistis and Židrina
represents the time-varying volatility, and ηt is the level of disturbance
(2018) directly optimizes the weights of the target and creates a custom
of the volatility. The parameter τ measures the standard error of the
moving average (CMA) for optimal smoothness and accuracy. Opti-
wave disturbance. The error term ηt is uncorrelated with εt, and both of
mizing the weight w to achieve the optimal accuracy at a given smooth
them are unobservable. The symbol φ denotes a continuous parameter,
level gives the following expression:
reflecting the impact of current volatility on future volatility. For
w = arg min acc {ma (w ), smo (ma (w )) < smo x } |φ| < 1, the SV model is covariance stationary. Letting ht = ht µ
w (4)
gives
Here, w is the weight vector, acc is the accuracy function, smo is the
smoothness function, ma is the moving average generated using the etu ~N (0, e µ + ht ) h
t = ht 1 + t, t ~N (0, 1) (11)
weight w, and smox is the set smoothness level. The optimization This paper uses Markov chain Monte Carlo (MCMC) methods, spe-
method adopts the machine learning method of gradient descent. in Eq. cifically using the optimization algorithm of Gregor and Sylvia (2014).
(4), the average accuracy in Eq. (2) is written as the following loss The resulting residual volatility ht is the uncertainty component of the
function: sequence (Chuliá et al., 2017).
n n
nl
cos tmod = acc ma + × |smoma cos t1| (5)
4. Evidence of financing rate uncertainty
Here, Λ is generally a large positive number to satisfy Eq. (4) cost1 is a
preset smoothness and a constant. Letting ΔCtn = Ctn − 2Ct−1n + Ct−2n 4.1. Variable design
and transforming Eq. (5) into the following matrix form gives
The empirical research uses 113,656 full sample data from 2016 to
1 p 1 p 2
cos t nl = |Cin WT ci| + × | Cin WT | const1 2018 collected by the Wenzhou Financial Office. On a daily basis, this
p i=1 p 2 i=1
sample contains 749 days of data, excluding holidays. Because more
(6) than one loan is granted every day, the daily average financing rate is
According to the loss function, the gradient formula can be obtained calculated by weighting the loan amount. The data of various mon-
as itoring points show that Wenzhou informal financing mainly derives
p from two fund suppliers: micro-loan company lending and direct social
cos t nl 1 lending. The direct social lending includes loans provided by non-
= sign (Cin W T ci ) Cin + ×
W p i= 1 p 2 governmental organizations such as relatives, friends, chambers of
1
p 2 p 2
commerce, and mutual aid associations. The lending methods of
sign | Cin W T| cos t1 × sign ( Cin W T ) Cin Wenzhou informal financing include credit loans and contract loans.
p 2 i= 1 i =1
Credit loans refer to loan relationships established by borrowers and
(7) lenders orally. Contract loans refer to loan relationships established in
The iterative update formula of the weight W according to the written form such as guaranties, guarantees, mortgages, and pledges.
gradient formula is given by Because data on 10-day loans are only available for 2017 onward, this
paper analyzes the loan periods of one month, three months, six
cos t ni
Wj + 1 = Wj + × months, one year, and more than a year. According to the stratifications
W (8)
of fund supplier, financing method, and financing period, the volatility
Here, λ is the learning rate, and j = 1, 2, …, N is the number of of the financing rate can be calculated according to the method de-
iterations. Using the gradient descent algorithm, the optimal weight w scribed in the third section, and the volatility can be decomposed into
with the minimum accuracy under a certain smoothness can be ob- risk and uncertainty. The comparative analysis is based on these data.
tained. The empirical calculations are realized using Python program- (See Table 4.)
ming, and the result is the optimal moving average man, where the
variance of the moving average is the risk sought (Chuliá et al., 2017). 4.2. Financing rate risk
Removing the moving average gives the residual of the sequence
Using the custom-optimized moving average method described in
etu = ct matn , t = 1, 2, …, p (9)
the previous section, the sample can be empirically analyzed to separate
the mean and the volatility. In the empirical simulation, the time length
3.2. Uncertainty of each time series is T = 749, and the smoothing of n terms loses the
front n samples. The result consists of T − n data. The data periods n
A stochastic volatility (SV) model (Chuliá et al., 2017) can be es- greatly affect the accuracy and smoothness of the model, and the op-
tablished using Eq. (9). The standard SV model is timization effects of the model also vary. To find the appropriate data

Table 4
Descriptive statistics of variables.
Categorical variables Sample size Mean SD Max. Min.

Fund suppliers Social direct lending 749 0.1472 0.0139 0.2066 0.1035
Micro-loan company lending 749 0.1627 0.0156 0.2148 0.1091
Financing methods Credit loans 749 0.1466 0.0138 0.1567 0.1373
Contract loan 749 0.1604 0.0145 0.1743 0.1462
Financing periods One-month period 749 0.1674 0.0251 0.2321 0.0744
Three-month period 749 0.1728 0.0166 0.2105 0.0919
Six-month period 749 0.1520 0.0160 0.1978 0.0803
One-year period 749 0.1430 0.0181 0.2109 0.0834
Over-a-year period 749 0.1470 0.0269 0.2700 0.0640

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B. Xu, et al. Industrial Marketing Management xxx (xxxx) xxx–xxx

Table 5 Table 7
Changes in average accuracy and average smoothness in different data periods. Moving average descriptive statistics (n = 15).
n Simple moving average Optimized moving Average Average Series Moving average
average accuracy smoothness
change change rate Mean Max. Min. Var.
Average Average Average Average rate
accuracy smoothness accuracy smoothness Social direct lending 14.7148 17.3301 13.5166 0.7296
Micro-loan company lending 16.2709 17.4178 14.6793 0.2310
5 2.9037 0.4596 1.5053 0.5648 48.16% −22.88% Credit loans 14.6588 15.6724 13.7326 0.3614
10 1.9460 0.2816 1.4579 0.2985 25.08% −5.99% Contract loan 16.0434 17.4339 14.6229 0.5661
15 1.7164 0.2218 1.4515 0.2233 15.44% −0.69% One-month period 16.7409 19.359 14.3992 1.0241
20 1.5949 0.1793 1.4418 0.1804 9.60% −0.63% Three-month period 17.2703 18.5319 14.9114 0.3482
25 1.5478 0.1608 1.4367 0.1619 7.18% −0.65% Six-month period 15.1882 16.6841 13.3685 0.2497
30 1.4941 0.1327 1.4307 0.1350 4.24% −1.73% One-year period 14.3044 17.5672 12.5382 1.2179
35 1.4773 0.1214 1.4297 0.1228 3.22% −1.21% Over-a-year period 14.6983 16.9926 12.2875 0.9249
40 1.4652 0.1120 1.4318 0.1131 2.28% −1.00%
45 1.4522 0.1048 1.4324 0.1057 1.37% −0.80%
50 1.4447 0.0987 1.4336 0.1004 0.77% −1.69%
at the original level, and the maximum change is 1.55%.
After iterating several times until the loss function is stable, the
moving average of each time series and the corresponding residual can
period n, n = 5, 10, 15, 20, 25, 30, 35, 40, 45, 50 can be used to
be obtained. The original time series and the moving average of n = 15
optimize the moving average of the sequence and average the experi-
simulate the trend of each financing rate sequence correctly. The
mental results in each layer. The results are shown in Table 5. Com-
moving average of each time series shows the average level of the se-
paring the average accuracy and smoothness of all experimental results
quence financing rate, as can be seen in Table 7. From the perspective
with different data periods shows that the optimization effect of the
of fund suppliers, the financing rate of micro-loan company lending was
model is better when the rate of change of accuracy is large and the rate
higher than that of social direct lending, but the risk of direct lending by
of change of smoothness is as small as possible. The table shows that the
society was greater than that of lending by micro-loan companies.
daily average financing rate for informal financing is suitable for the
Combined with the trend chart of the moving average, it is further
short-term and medium-term smoothing. When n = 50, there is little
found that the risk of direct social lending mainly came from early
improvement in accuracy. When n is over 35, the weight is negative
September 2016. In the early period, there was high volatility in direct
after updating. The model with n = 15 performs best considering the
social lending. From then on, the financing rate risk of micro-loan
average accuracy change rate and the average smoothness change rate.
company loans was greater than that of direct social lending. From the
The accuracy change rate is above 10%, and the smoothness change
perspective of financing methods, the average financing rate of credit
rate is below 1%. Therefore, n = 15 is used in the subsequent empirical
loans was lower than that of contract loans, and the risk of contract
analysis.
loans was higher than that of credit loans. From the perspective of the
These empirical results show that the accuracy value is generally
financing period, the financing rate of short-term and medium-term
about 10 times bigger than the smoothness value. Therefore, the con-
loans was relatively high. The financing rates of the one-month and
stant in the model is Λ = 10, and the learning rate λ is a parameter
three-month loans were the highest, and the one-year loan financing
adjusted according to the degree of convergence of the cost function. If
rate was the lowest. The relationship between the average financing
the learning rate is too small, the convergence rate of the model is slow,
rates at different maturities is as follows: One-month period > Three-
and the excessively high learning rate makes the cost function steep.
month Period > Six-month Period > Over-a-year period > One-year
Finally, in this paper, the learning rate is taken as λ = 0.0001, ac-
period. The variance of the moving average indicates the risk of each
cording to the debugging result. The cost1 in Eq. (5) takes the
financing rate series. The size relationship between the risk of financing
smoothness of the simple moving average of the n terms corresponding
rates at different maturities is as follows: One-year period > One-month
to the sequence as the upper limit of smoothness. The model with
period > Over-a-year period > Three-month Period > Six-month
n = 15 converges faster, and the model is stable after j = 800 itera-
Period. Thus, the one-year period and one-month period are the risk-
tions. The fitting accuracy and smoothness of the model and the moving
iest.
average can be obtained. The accuracy and smoothness values shown in
Table 6, compared with the simple moving average method of Aistis
and Židrina (2018), improve accuracy. The biggest change in accuracy 4.3. Financing rate uncertainty
is in the accuracy of direct social lending, which decreases by 29.73%.
The smallest accuracy change is in the accuracy of lending with a one- The residuals of each sequence can be obtained using Eq. (9). First,
year period, which decreases by 6.96%. The smoothness is maintained the stationarity and normality of each sequence must be tested. The

Table 6
Accuracy and smoothness of each layer (n = 15).
Series Simple moving average Optimized moving average

Accuracy(accma ) Smoothness(smoma ) Accuracy(accma ) Smoothness(smoma )

n n n n

Social direct lending 1.2692 0.1450 0.8918 0.1455

Micro-loan company lending 1.5650 0.2024 1.2633 0.2036
Credit loans 1.2451 0.1510 0.9236 0.1512
Contract loan 1.4504 0.1866 1.1374 0.1873
One-month period 2.1584 0.2899 1.9796 0.2899
Three-month period 1.6667 0.2127 1.3414 0.2127
Six-month period 1.5851 0.2031 1.3172 0.2041
One-year period 1.4662 0.1887 1.2229 0.1899
Over-a-year period 2.3047 0.3107 2.1444 0.3124

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B. Xu, et al. Industrial Marketing Management xxx (xxxx) xxx–xxx

Table 8 Table 10
Descriptive statistics of financing rate residuals under different fund suppliers Calculation results of SV model for each sequence of different fund suppliers.
and methods.
Fund suppliers Parameter Mean SD Bayesian estimates
Series Social direct Micro-loan Credit loan Contract loan
lending company lending 5% 50% 95%

Mean −0.0024 −0.0157 0.0037 −0.0218 Social direct lending μ 0.1093 0.0973 −0.0509 0.1095 0.2711
Max. 4.7937 5.4870 6.8897 5.4613 ϕ 0.9414 0.0324 0.8788 0.9481 0.9807
Min. −5.2965 −5.4307 −5.1633 −4.8331 τ 0.2290 0.0696 0.1328 0.2192 0.3582
SD 1.1933 1.6087 1.2174 1.4409 Micro-loan μ 0.8226 0.0722 0.7033 0.8230 0.9405
Skewness −0.1133 −0.0905 0.0459 0.0032 company ϕ 0.8990 0.0622 0.7826 0.9099 0.9785
Kurtosis 4.8556 3.5931 5.7667 3.6404 lending τ 0.2026 0.0794 0.0812 0.1980 0.3407
J-B statistic 107.025⁎⁎ 11.779⁎ 234.357⁎⁎ 12.544⁎
L-B statistic 55.894⁎⁎ 36.031⁎⁎ 51.389⁎⁎ 36.395⁎⁎
ADF test −25.07⁎⁎ −26.45⁎⁎ −25.24⁎⁎ −25.9221⁎⁎ Table 11
statistic
SV model results for sequences with different financing methods.
⁎
Represents rejection of the null hypothesis at the 5% significance level. Financing methods Parameter Mean SD Bayesian estimates
⁎⁎
Represents rejection of the null hypothesis at the 1% level of significance.
5% 50% 95%

commonly used test statistics are presented in this paper. Table 8 and Credit loans μ 0.0488 0.0597 −0.0505 0.0493 0.1460
Table 9 show the results of the statistical test of the residuals. Re- ϕ 0.8397 0.0863 0.6766 0.8548 0.9516
gardless of whether it is the sequence of financing rate residuals under τ 0.3549 0.1100 0.1853 0.3490 0.5469
different fund suppliers, different financing methods, or different fi- Contract loans μ 0.0254 0.0717 −0.0915 0.0248 0.1438
0.9943 0.0080 0.9831 0.9964 0.9994
nancing periods, the kurtosis is greater than 3, which shows that each
ϕ
τ 0.0634 0.0344 0.0264 0.0559 0.1266
sequence has a sharp peak and a thick tail. With respect to skewness,
the skewness values under credit loans and contract loans are greater
than 0, and each sequence is right-biased. The skewness of the other Table 12
sequences is less than 0, indicating that the sequence is left-biased. The Results of SV models for each sequence of different financing periods.
results of the J-B statistic suggest that for each sequence, the hypothesis
Financing period Parameter Mean SD 5% 50% 95%
of the normal distribution should be rejected. The white noise test was
performed on the sequence using the L-B statistic. The result for each One-month period μ 0.8317 0.1021 0.6652 0.8311 1.0003
sequence is not purely random. The results of the unit root test of the ϕ 0.9986 0.0013 0.9962 0.9989 0.9998
0.0393 0.0142 0.0208 0.0371 0.0656
augmented Dickey-Fuller (ADF) test show that all sequences are rela- τ
Three-month period μ 0.9414 0.0627 0.8374 0.9422 1.0433
tively stable. ϕ 0.8301 0.0956 0.6468 0.8486 0.9501
In this paper, the residuals of the moving averages of each sequence τ 0.2164 0.0782 0.0992 0.2100 0.3568
in Section 4.2 are modeled by the stochastic volatility model, and the Six-month period μ 0.8864 0.0618 0.7847 0.8863 0.9882
MCMC method is used for parameter estimation. In the model simula- ϕ 0.7714 0.0802 0.6282 0.7797 0.8872
0.2999 0.0748 0.1840 0.2960 0.4285
tion process, 10,000 iterations were performed for each parameter, and
τ
One-year period μ 0.7999 0.0638 0.6953 0.7999 0.9046
simulated annealing was performed to ensure the convergence of the ϕ 0.8543 0.0886 0.6734 0.8758 0.9566
parameters. The original iteration was then abandoned, and another τ 0.2019 0.0757 0.0979 0.1917 0.3422
60,000 iterations were performed to simulate the model. The Bayesian Over-a-year period μ 0.8326 0.1015 0.6651 0.8330 0.9995
0.9965 0.0029 0.9907 0.9973 0.9995
estimation of the parameters can be simulated by the MCMC numerical ϕ
τ 0.0678 0.0290 0.0303 0.0625 0.1231
calculation method. The mean, standard deviation, and Bayesian esti-
mates of the parameters of each sequence residual under the SV model
are given in Table 10, Table 11, and Table 12. Bayesian estimates are parameter μ of the social direct lending in Table 10 is 0.1093, and the
given for the 5%, 50%, and 95% quantiles. posterior confidence interval with a 95% confidence level is [−0.0509,
From the results of the 60,000 sample estimates (Table 10), the 0.2711]. The estimated value of the volatility level parameter μ of
iterative trajectory diagram of the parameters, and the simulated pos- micro-loan company lending is 0.8226. The 95% posterior confidence
terior distribution of the parameters, the model parameters are esti- interval is [0.7033, 0.94056], indicating that the financing rate residual
mated to be robust. The estimated value of the volatility level sequence volatility level of social direct lending is smaller than that of

Table 9
Description of financing rate residuals under different financing periods.
Categorical One-month period Three-month Six-month period One-year period Over-a-year
variables period period

Mean −0.0124 −0.0194 −0.0099 −0.0179 −0.0206

Max. 7.3117 4.0300 4.8949 5.1138 12.8004
Min. −9.7803 −7.6965 −7.6482 −7.3542 −9.0789
SD 2.4871 1.6825 1.6532 1.556 2.7156
Skewness −0.1475 −0.5368 −0.5509 −0.2898 −0.0621
Kurtosis 3.3865 3.8542 3.9227 3.851 3.7227
J-B statistic 7.2394⁎ 57.641⁎⁎ 63.2555⁎⁎ 32.4723⁎⁎ 16.4667⁎⁎
L-B statistic 38.292⁎ 48.349⁎⁎ 38.351⁎⁎ 37.709⁎ 34.791⁎
ADF test −26.27⁎⁎ −25.82⁎⁎ −25.77⁎⁎ −25.07⁎⁎ −26.30⁎⁎
statistic

⁎
Represents rejection of the null hypothesis at the 5% significance level.
⁎⁎
Represents rejection of the null hypothesis at the 1% level of significance.

6
B. Xu, et al.
Fig. 1. Uncertainty time series curve with different fund suppliers.
the micro-loan company lending. The estimates of the volatility per-
sistence parameter ϕ of social direct lending and micro-loan company
lending are close to 1, indicating that financing rate residual sequences
of both social direct lending and micro-loan company lending have
strong persistent volatility, and the volatility of social direct lending is
more persistent than that of micro-loan company lending. The absolute
value of the precision parameter τ of social direct lending is larger than
that of micro-loan company lending, indicating that the sequence of
financing rate residuals of the social direct lending has more noise.
According to the calculation results, the graph of the uncertainty
estimate may be plotted. The data in Figure Fig. 1 show that the un-
certainty of the social direct lending rate was larger than the financing
rate of micro-loan company lending in the first half of 2016. However,
after September 2016, the uncertainty of the social direct lending rate
was smaller than that of the micro-loan company lending rate.
Similarly, the parameter estimation results in Table 11 show that
the volatility level relation of the financing rate residual sequence with
different financing methods is as follows: Credit Loan > Contract Loan.
The estimated value of the volatility persistence parameter ϕ is close to
1, indicating that the financing rate residual sequences have strong
volatility persistence and that Credit Loan < Contract Loan. The abso-
lute value of the accuracy parameter τ indicates that the sequence of
financing rate residuals of credit loans has more noise. Based on the
calculation results, the graph of uncertainty estimation can be plotted.
Figure Fig. 2 shows that in September 2016, the absolute uncertainty
value of the credit loan was greater than the value of the contract loan.
After this date, the uncertainty of the contract loan was relatively large
and followed an upward trend. This pattern may be due to the fact that
credit loans primarily come from social direct lending, which leads to
greater uncertainty in credit loans observed before September 2016.
Similarly, the parameter estimation results in Table 12 can be used
to derive the volatility level of the financing rate residual sequences of
different financing periods. The size relationship between volatility
Fig. 2. Uncertainty time series curve under different financing methods.
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Industrial Marketing Management xxx (xxxx) xxx–xxx
levels is as follows: Three-month period > Six-month period > Over a
year > One-month period > One-year period. The estimated value of
the volatility persistence parameter ϕ is close to 1, indicating that the
financing rate residual sequences have strong volatility persistence and
that One-month period > Over-a-year period > One-year period >
Three-month period > Six-month period. The absolute value of the
accuracy parameter τ shows that the size relationship between the noise
of the sequences is as follows: Six-month period > Three-month
period > One-year period > One-month period > Over-a-year period.
Based on the calculation results, the graph of uncertainty estimation
may be plotted. The data in Figure Fig. 3 show that the uncertainty is
greatest for financing rates for one-month loans and for loans of more
than one year. There is little difference in uncertainty between the loans
of three-month, six-month, and one-year periods. This size relationship
is basically consistent with the risk measurement results in the previous
section, except for one-year lending. The risk of the financing rate for
one-year loans is relatively large in comparison with the results in the
previous section. It is of a similar magnitude as the risk of the financing
rate for loans of one-month or more than one year. Further analysis
shows that since the one-year loan is primarily social direct lending, the
trend of its moving average is similar to that of social direct lending.
Given the variance level of each term after September 2016, the var-
iance level of one-year loans decreased from 1.2179 to 0.2431, while
the variance level of loans of other terms basically remained un-
changed. In summary, the size relationship between the uncertainty of
financing rates under different financing periods is consistent with the
calculation of financing rate risk.
5. Conclusions and policy implications
This paper is based on the idea of the uncertainty index described by
Chuliá et al. (2017). It also combines the optimization of the custom
moving average and the stochastic volatility (SV) model method (Aistis
B. Xu, et al.
Fig. 3. Uncertainty time series curve for each financing period.
& Židrina, 2018). Thus, this paper establishes a new research frame-
work of risk and uncertainty, which is used to decompose trends and
volatility in the time series of financing rates and to separate risk and
uncertainty. The main results are now presented.
First, considering the risk of financing rate volatility from the per-
spective of fund suppliers, before September 2016, the financing rate
risk of social direct loans was greater than that of micro-loan company
lending; after September 2016, the financing rate risk of small loan
company lending was greater than that of social direct loans. Viewed
from the perspective of financing methods, credit loans are less risky
than contract loans. Viewed from the perspective of financing periods,
one-year and one-month loans carry the highest risk.
Second, considering the uncertainty of financing rate volatility from
the perspective of fund suppliers, the trend of uncertainty is similar to
the trend of risk. Before September 2016, the financing rate uncertainty
of social direct loans was greater than that of micro-loan company
lending. The situation reversed after September 2016. Viewed from the
perspective of financing methods, before September 2016, the financing
rate uncertainty of credit loans was greater than that of contract loans.
The situation reversed after September 2016. This pattern may be due
to the fact that most credit comes from direct social borrowing. Viewed
from the perspective of financing periods, uncertainty about financing
rates for one-month loans and loans of more than a year is relatively
high, while the uncertainty of three-month, six-month, and one-year
loans is relatively low. The high uncertainty of one year or more may
derive from the long borrowing cycle. The high uncertainty of one
month may derive from the use of the loan for capital turnover.
In sum, the large financing rate uncertainty of informal financing
primarily occurs when the fund supplier is a micro-loan company, the
lending method is a contract loan, or the loan term is one month or over
a year. The policy implications of these results are that China should
strengthen its rule of law, establish the spirit of contract, regulate
micro-loan companies, increase the liquidity of short-term working
capital for one month and investment capital for one year or more,
control risks and avoid uncertainties, and expand the scale of social
direct lending.
It is difficult to solve the problem of financing difficulties for
startups by relying solely on market-operated micro-loan companies.
Because of high financing rates, risks and uncertainties are also high,
especially with short-term financing. The local government creates a
good rule of law environment, develops an inclusive financial system,
promotes the liquidity of funds, and helps startups grow steadily. The
financing rate of informal finance is high, financing amounts are small,
terms are short, and risk and uncertainty are high. In this paper, un-
certainties are extracted from residuals (Chuliá et al., 2017), and the
results are robust after tens of thousands of iterative calculations.
However, the residual completely depends on the selection of
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Industrial Marketing Management xxx (xxxx) xxx–xxx
prediction accuracy and the assumptions of the SV model. There are
limitations in the model design. Two questions that should be addressed
in future research are 1) how to separate risk and uncertainty directly
from financing rate volatility rather than from residuals and 2) how to
reduce the risk and uncertainty of the financing rate and the financing
amount and increase the average financing amount by optimizing the
term allocation for the financing rate and financing amount.
Declaration of Competing Interest
None.
Acknowledgments
This work was supported by the Research on the construction and
application of regional financial risk index in China [grant numbers
18ZDA093]. National Office for Philosophy and Social Sciences; and
First-Class Discipline of Zhejiang - A [grant number
1020JYN4118004G-37] (Zhejiang Gongshang University - Statistics).
The authors are very grateful to Qingfeng Liu's overseas doctoral team
for their valuable comments to a preliminary draft uncertainty in fi-
nancing rates for startups.
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