Discussion of “ Credit , Asset Prices , and Financial Stress ” ∗

Let me start with praise for the paper and also introduce the structure of my comments. The paper by Misina and Tkacz is part of recent, broader literature investigating how asset prices and other financial variables can help document and predict financial stress and financial distress. Clearly, since we have faced the largest financial crisis in advanced countries since the Great Depression, nobody needs to be reminded how important this type of research is. It would have been extremely useful for policymakers to have an objective tool on the basis of which they could have anticipated at least some of the turmoil over the past year. This would also have been helpful for private market participants, since that could have provided a check on the excessive risk taking that went on in many financial markets. In this context, the paper is a very useful addition to the literature on financial stress indexes (FSIs) and their counterpart—the financial condition indexes (FCIs)—which try to capture respectively the stress and buoyancy of financial markets. It is, by the way, remarkable how the Bank of Canada has been at the forefront of the development of financial stress indexes, first with the paper by Illing and Liu (2006) and now with this paper. Given that Canada seems to be one of the few countries that have largely escaped the global financial crisis, it is tempting to attribute this to development and application of FSIs in policymaking. It will be hard to provide evidence whether this is the case, but I think it would be a great example of the Lucas critique working to the benefit of financial stability.