| Abstract : | The relationship among stock market returns and macro variables has been examined by many researchers till now all over the world. They have examined not only if there is a significant statistical contemporaneous relationship among stock returns and some macro variables but also if there is a lead lag relationship among them, mainly in developed and secondly in emerging markets. The aim of this research is to find out if granger causality exists among the returns of Greek market equity index, macro-variables and the Greek economic sentiment indicator. Saying Granger causality we mean that past prices of specific variables affect current prices of the equity index returns. The empirical results of these researches contribute to the fact, that the investors mainly institutional and portfolio managers, and finally the policy makers can make decisions and forecasts to the right way, about the Greek equity index’s direction. In this paper we investigate the Granger causality (lead – lag relationship) among Greek equity index returns and the following global and domestic macro variables: changes of the crude oil prices , unexpected inflation rate, industry production rate, rate of the Greek economic sentiment indicator, term spread, and the euro-us dollar exchange rate. The differences of this paper compared with other similar concerning Greek stock market are that we have decomposed the inflation rate to the expected and unexpected components and we have included the sentiment indicator. In order to decompose the inflation rate we have used an appropriate ARIMA model. The method we have used in this paper is a multivariate VAR, Vector Autoregressive model. Then we have used the Granger causality tests, the impulse responses and finally the variance decomposition. The results of this research are that only the economic sentiment indicator causes the returns of the Greek equity index. From the other direction the returns of the market equity index cause almost marginally the economic sentiment indicator and cause the term spread so it is considered as a leading indicator both for the term spread and for the economic sentiment indicator. Finally, the largest proportion of the movements of equity index’s returns is due to its own shocks and a positive shock of the economic indicator has a significant short run positive effect to the returns of the Greek equity index.
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