Measuring financial stress in a developed country: An application to Canada

This paper develops an index of financial stress for the Canadian financial system. It is a continuous variable with a spectrum of values, where extreme values are called financial crises. An internal Bank of Canada survey is used to condition the choice of variables. The authors show that alternative measures of financial crisis suggested by the literature do not accurately reflect the Canadian experience, while several measures developed in this paper are more representative and are thus likely better suited to a developed financial system. An accurate characterization of stress is a prerequisite for any researcher attempting to forecast financial crises.