Testing for correlation and causality relationships between stock prices and macroeconomic variables: The case of Palestine Securities Exchange

This study aims at investigating the correlation and causality relationships between stock prices in Palestine and some macroeconomic variables. Two methodologies were used in order to determine the relationships, first we used a regression analysis for ten years’ worth of quarterly data (40 observations in total) for the studied variables, five macroeconomic variables were used as independent variables (GDP, inflation, exchange rate, Libor rate and balance of trade), and the quarterly stock market index returns were used as the dependant variable. Second, a unit root test was conducted on the studied variables in order to perform a Granger causality test to assess the causality relationship. The results of the regression analysis as a whole indicate a significant relationship between the macroeconomic variables used and stock prices. Nevertheless, some macroeconomic variables’ coefficients (although having a significant relationship with stock prices) weren’t consistent with the results of other researches. Moreover, the causality analysis negated any kind of causal relationships between each particular macroeconomic variable and stock prices.