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

David Gray (Faculty of Business and Law, Lincoln Business School, The University of Lincoln, Lincoln, UK)

International Journal of Managerial Finance

ISSN: 1743-9132

Publication date: 30 March 2012



The purpose of this paper is to examine whether the banking crisis in the USA 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 paper also considers whether the “hardness” of the currency peg affects the market reaction to that crisis.


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.


Rather than weaken, the bonds between the currency board‐managed Kroon and the Litas, in a similar way to the Lat, exhibited greater bonding after the banking crisis began compared with before. The phase angles suggest some shift in money flows between the Baltic currencies and the Euro. With the Lat, the delays appear to be the 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 bonding between currencies of ERMII countries and the Euro increased, but the structure of money flows changed as a result of the Western banking crisis in related geographical and financial markets, before a local crisis became evident. To what extent this is an improvement over correlation methods could be the basis of further research. The phase switch is a structural change that other techniques could not have revealed.


The paper shows that spectral analysis could be more widely used in financial economics to reveal the impact of events on term structures.



Gray, D. (2012), "Baltic States and the Euro: a spectral analysis of the 2007 financial crisis", International Journal of Managerial Finance, Vol. 8 No. 2, pp. 139-154.

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