Baltic states and the Euro: a spectral analysis of the 2007 financial crisis

Gray, David (2012) Baltic states and the Euro: a spectral analysis of the 2007 financial crisis. International Journal of Managerial Finance, 8 (2). pp. 139-154. ISSN 1743-9132

Full content URL: Http://dx.doi.org/10.1108/17439131211216611

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Abstract

Purpose
To examine whether the banking crisis in the US and Western Europe that began in August 2007 precipitated a change in the relationship between the currencies of the Baltic States and the Euro, such that it could be described as shift contagion. The second aim is to consider whether the ‘hardness’ of the currency peg affects the market reaction to that crisis.

Design/Methodology
Shift contagion is said to be revealed if there a change in the co-movements of exchange rates after August 2007 compared with before. Change is revealed by coherence and phase shifts. Both are drawn from cross-spectral analysis.

Findings
Rather than weaken, the bonds between the currency board-managed Kroon and the Litas in a similar way to the Lat in exhibiting greater bonding after the banking crisis began compared with before. The phase values suggest some shift in money flows between the Baltic currencies and the Euro. With the Lat, the delays appear to same but at longer periodicies. The other two appear be subject to a reversal of money flows at various periodicies.

Research limitations/implications
Spectral analysis reveals that co-movement between currencies of ERMII countries and the Euro intensified, but the structure of money flows changed as a result of the western banking crisis in related geographical and financial markets. The phase switch is a structural change that other techniques could not have revealed.

Originality/value
Spectral analysis could be more widely used in financial economics to reveal the impact of events on term structures.

Keywords:Spectral Analysis, contagion, Baltic States
Subjects:L Social studies > L160 International Economics
L Social studies > L111 Financial Economics
Divisions:Lincoln International Business School
ID Code:8413
Deposited On:27 Mar 2013 11:11

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