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

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Focusing on the recent experience of the EMS, the paper examines the behavior of domestic daily returns on bond and stock markets with the objective of identifying whether there exist significant differences in the patterns of volatilities and international correlations between ERM and non-ERM countries 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 increase in exchange rate volatility is accompanied by a decline in international correlations between bond and, to a lesser extent, stock markets.