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Canadian Financial Stress and Macroeconomic Conditions

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Severe disruptions in the financial markets, as observed during the 2008 global financial crisis or the COVID-19 pandemic, can impair the stability of the entire financial system and worsen macroeconomic downturns.

I construct a new composite index to measure Canadian financial market stress. The index reflects systemic stress. It increases disproportionally more when stress occurs simultaneously on several markets than when stress occurs separately on individual markets.

The index can be used for monitoring. It reaches a peak during the COVID-19 pandemic second only to the 2008 crisis. The index can also be used to model non-linear macroeconomic relationships. Macroeconomic conditions deteriorate significantly when the Canadian financial stress index is above its 90th percentile.