This study investigates the short-term relationship between the UK stock market index (FTSE 100) and six macroeconomic variables during the period 2000-2013 using multivariate vector autoregression and causality testing by Granger. Variance decomposition and impulse response functions are used to measure the shocks of a variable to other variables, and the Granger causality test is used to investigate the lead-lag relationships between these variables. Introduction The aim of this thesis is to examine the short-run dynamic relationship between the UK stock market and several macroeconomic variables such as industrial production, which is a proxy for economic activity, inflation, money supply, short-term and long-term interest rates and personal consumption expenditure for the period 2000-2013 using vector autoregression (VAR) and Granger causality. This allows us to investigate the dynamic interactions and causal relationships between these variables. The choice of variables is based on the fact that these are generally proposed as the most important variables used in specifications. However, it is perhaps not true that consumption is always included in these specifications. The reason we included consumption is that we would like to examine the impact of the so-called “wealth effect”. The period 2000-2013 was chosen due to its novelty, the fact that it covers the global financial crisis and also there appears to have been no empirical work carried out during this time period. After an extensive search we could only find three articles examining the relationship between the UK stock market and macroeconomic variables. The methods used in these papers are: Arbitrage pricing theory… half of the paper… VAR analysis performed on US stock returns and macroeconomic variables. Ratanapokoran and Sharma found that, using variance decomposition, stock prices are somewhat exogenous to other variables. He arrives at this result because he finds that 87% of the variance in the stock price is explained by its own shock. He goes on to argue that this finding is the result of stock prices being less dependent on macroeconomic variables and more dependent on themselves. He also finds that macroeconomic variables have no effect on stock prices. The main finding of the Dhakal and Khandil paper is that there is a “direct causal impact” of changes in money supply on stock prices. They attribute this to changes in the money supply having an influence on the interest rate and inflation, whereby changing interest rates and inflation have an indirect impact on stock prices.