The key objective of this study is to shed light on the relationship between the stock market and macroeconomic factors in two emerging economies (Egypt and Tunisia) for the period from January 1998 to January 2014. Results indicated that there is a causal relationship in Egypt between market index and consumer price index (CPI), exchange rate, money supply, and interest rate. The same goes for Tunisia except for CPI, which had no causal relationship with the market index. Results also revealed that the four macroeconomic are co-integrated with the stock market in both countries.

According to the famous "Capital Asset Pricing Model", the market return should be related to the risk associated with macroeconomic health of economy as the latter affects an individual's firm cash flows and the systematic risk component. Therefore, the overall performance of Macroeconomic condition of a firm can be evaluated based on some macro variables. In this paper, the main aim is to examine how the volatility of the US$ Exchange rate is related to the stock market return volatility in the context of Egyptian capital market. Weekly data for the (0111998-0412004) period are considered for the study. Since many macroeconomic variables and stock returns are believed to follow GARCH process, this technique is used to find predicted volatility series for the variables considered in the study.

No abstract