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An Index of Financial Stress for Canada

Author

Listed:
  • Mark Illing
  • Ying Liu

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.

Suggested Citation

  • Mark Illing & Ying Liu, 2003. "An Index of Financial Stress for Canada," Staff Working Papers 03-14, Bank of Canada.
  • Handle: RePEc:bca:bocawp:03-14
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial institutions; Financial markets;

    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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