An Empirical Analysis of Information Asymmetry in Home Equity Lending

33 Pages Posted: 9 Mar 2015  

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Chunlin Liu

University of Nevada, Reno - College of Business

Date Written: March 7, 2015

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.

Keywords: Asymmetric information, Adverse selection, Moral hazard, banking, Home equity lending

JEL Classification: D1, D8, G21

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Liu, Chunlin, An Empirical Analysis of Information Asymmetry in Home Equity Lending (March 7, 2015). Journal of Financial Services Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2575230

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Chunlin Liu (Contact Author)

University of Nevada, Reno - College of Business ( email )

University of Nevada, Reno
Reno, NV 89557-0016
United States

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