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An Empirical Analysis of Information Asymmetry in Home Equity Lending

Author

Listed:
  • Sumit Agarwal

    () (National University of Singapore)

  • Souphala Chomsisengphet

    () (Office of the Comptroller of the Currency)

  • Chunlin Liu

    () (University of Nevada, Reno)

Abstract

Abstract We analyze more than 74,000 home equity loans and lines of credit to study the role of information asymmetry. This credit market is characterized by borrowers who face a menu of contract options with varying collateral requirements and prices. Our results show that a less credit worthy applicant is more likely to select a credit contract that requires less collateral. Further analysis on the borrower’s repayment behavior after controlling for observable risk attributes indicates that the lender faces adverse selection and moral hazard due to private information.

Suggested Citation

  • Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu, 2016. "An Empirical Analysis of Information Asymmetry in Home Equity Lending," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(1), pages 101-119, February.
  • Handle: RePEc:kap:jfsres:v:49:y:2016:i:1:d:10.1007_s10693-015-0216-z
    DOI: 10.1007/s10693-015-0216-z
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Asymmetric information; Adverse selection; Moral hazard; Banking; Home equity lending;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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