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An Index of Financial Stress for Canada

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Author Info
Mark Illing
Ying Liu

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Abstract

The authors develop an index of financial stress for the Canadian financial system. Stress is defined as the force exerted on economic agents by uncertainty and changing expectations of loss in financial markets and institutions. It is a continuous variable with a spectrum of values, where extreme values are called financial crises. Information about financial stress is extracted from a wide array of financial variables using several techniques, including factor analysis, econometric benchmarking, and generalized autoregressive conditional heteroscedasticity (GARCH) modelling. An internal Bank of Canada survey is used to condition the choice of variables and to evaluate their ability to reflect the responses to the survey regarding highly stressful financial events. The authors show that alternative measures of financial crises suggested by the literature do not accurately reflect the results of the survey, while several measures developed in this paper do reflect them.

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Paper provided by Bank of Canada in its series Working Papers with number 03-14.

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Length: 63 pages
Date of creation: 2003
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Handle: RePEc:bca:bocawp:03-14

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Related research
Keywords: Financial institutions; Financial markets;

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Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. O. Aspachs & C. Goodhart & M. Segoviano & D. Tsomocos & L. Zicchino, 2006. "Searching for a Metric for Financial Stability," OFRC Working Papers Series 2006fe09, Oxford Financial Research Centre. [Downloadable!]
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  2. Dairo Estrada & Miguel Ángel Morales Mosquera, . "Indice de Estabilidad Financiera para Colombia," Temas de Estabilidad Financiera 038, Banco de la Republica de Colombia. [Downloadable!]
  3. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department. [Downloadable!]
  4. Urs W. Birchler & Matteo Facchinetti, 2007. "Can Bank Supervisors Rely on Market Data? A Critical Assessment from a Swiss Perspective," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(II), pages 95-132, June. [Downloadable!]
    Other versions:
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