Exchange rate regime, volatility and international correlations on bond and stock markets

Focusing on the recent experience of the EMS, the paper examines the behavi or of domestic daily returns on bond and stock markets with the objective o f identifying whether there exist significant differences in the patterns o f volatilities and international correlations between ERM and non-ERM count ries and across alternative episodes of ERM exchange rate variability. The paper provides substantial evidence that a credible peg is associated with a decline in bond market volatility. The analysis also shows that an increa se in exchange rate volatility is accompanied by a decline in international correlations between bond and, to a lesser extent, stock markets. (C) 1999 Published by Elsevier Science Ltd. All rights reserved.