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An Index of Financial Stress for Canada

  • Mark Illing
  • Ying Liu

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 Staff Working Papers with number 03-14.

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