Abstract
The study examines the relationships between the KSE100 index and a set of macroeconomic variables over sampling period in January 1999 to June 2008. Co-integration, Granger causality and error correction tests were used to analyze the relationship between stock prices (KSE100 index) and macroeconomic variables. The findings from the co-integrating tests suggested that stock prices and macroeconomic variables were co-integrated and that at least a uni-directional causality exists between the two sets of variables. The results further suggested that stock prices were positively related with money supply and short term interest rates and negatively related with inflation and foreign exchange reserves. Key words: Stock prices, macroeconomic variables, co-integration.
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