This paper studies the mechanism of adverse selection in the credit market using a sample of mortgage applications that are approved by lenders but rejected by applicants. We find that a low-risk applicant is more likely to reject a loan offer, except when the offer is made by an informed lender. Using jumbo mortgage and loan acceptance rate data to proxy for the information advantage, we find that lenders with a lower likelihood of being rejected are indeed better informed than others.

We consolidate a large number of mean-significant anomalies into cluster portfolios. More than a third of cluster portfolios remain significant under the Hou et al. (2020) five-factor model — the best performing among six benchmark models tested. A best-first search yields nine factors that subsume all cluster portfolios as well as all significant anomalies, demonstrating the feasibility of a parsimonious description of average realised returns. The expected growth factor (EG) and a cluster portfolio linked to accruals are prominent factors that improve pricing performance. The search-generated model produces a monthly maximum squared Sharpe ratio of 0.51, considerably higher than current benchmark models.

We present a new data set for 74 economies over 1990–2016 on domestic bank credit distinguishing between four categories: household mortgages, household consumption credit, loans to non-bank financial institutions, and loans to non-financial business. We offer a description of sources and data collection methods and a comparison with similar data sets. We document the key data trends including a shift in bank credit allocation away from business lending. The literature suggests that this ‘debt shift’ has substantial consequences for growth, income distribution and macroeconomic resilience, which motivates the construction of a new data set. We apply the data to analyze the effect of an increase in mortgage lending flows on business credit flows. We identify several theoretical transmission channels which involve collateral and bank balance sheet effects and wealth effects on consumption. The impact of mortgage credit expansion on business credit growth is found to be positive in advanced economies and negative in emerging and developing economies.