Unsustainable credit growth leads to financial stability risks, with real repercussions. But what is unsustainable? In this paper we suggest that the balance between the growth in mortgage credit and business credit is a key factor in post-crisis macroeconomic vulnerability. The sample-average rise in credit composition (the share of household mortgage credit in total credit) in 51 economies in the five years before the 2007 global financial crisis is associated with a 2.1% average growth loss in the five years after the crisis. This finding is robust for total-credit growth and for post-crisis fiscal and monetary policy responses. Delving into the channels, we find that larger changes in credit composition before the crisis are linked to less efficient capital reallocation and larger investment cutbacks afterwards.

Many recently proposed, seemingly different factor models are closely related. In spanning tests, the q-factor model largely subsumes the Fama–French five- and six-factor models, and the q5 model subsumes the Stambaugh–Yuan four-factor model. Their “mispricing” factors are sensitive to the construction procedure, and once replicated via the traditional approach, are close to the q-factors, with correlations of 0.8 and 0.84. Finally, consistent with the investment CAPM, valuation theory predicts a positive relation between the expected investment and the expected return.

Embedding disasters into a general equilibrium model with heterogeneous firms induces strong nonlinearity in the pricing kernel, helping explain the empirical failure of the (consumption) CAPM. Our single-factor model reproduces the failure of the CAPM in explaining the value premium in finite samples without disasters and its relative success in samples with disasters. Due to beta measurement errors, the estimated beta-return relation is flat, consistent with the beta “anomaly,” even though the true beta-return relation is strongly positive. Finally, the consumption CAPM fails in simulations, even though a nonlinear model with the true pricing kernel holds exactly by construction.