The long-run relationship between stock indices and economic factors in the ASE: an empirical study between 1989 and 2006

The present paper is focused on the examination of long-run relationships between specific stock indices and a number of economic factors in the Athens Stock Exchange (ASE) during the period between 1989 and 2006. After a theoretical and empirical review of unit root and cointegration analysis we present the methodology that is used so as to examine whether the series of the variables are cointegrated or not. The results of the tests indicated that for the whole period, as well as for specific subperiods, the indices seem to be related to specific groups of variables. These results verify in many cases prior economic hypotheses regarding the relationship between financial and macroeconomic variables. Investors can construct their portfolios by taking into consideration specific relationships between variables since there are factors that seem to have an explanatory power on the behavior of stocks leading to a possible inefficiency of the Greek market.