Purpose The aim of this research is to re-examine the dynamic linkages between macroeconomic variables and the stock market indices in Malaysia following some transformational changes in the policies and the exchange rate regime.

Design/methodology/approach Using monthly data points for all the economic variables and the stock market index (KLCI Index), the authors applied vector autoregression (VAR) model to examine the relationship. The authors also used impulse response function (IRF) in order to explore the effect of one-unit shock in “X” on “Y” under the VAR environment.

Findings The authors' study finds a significant relationship between all the macroeconomic variables and the stock market index of Malaysia. The cointegration results indicate a long-term relationship, whereas the vector autoregressive-based impulse response analysis suggests that the Malaysian stock index (KLCI) responds negatively to the money supply, inflation and producer price index (PPI). However, the authors' results indicate a positive response from the stock index to the exchange rate.

Research limitations/implications The authors' study's results are based on selected macroeconomic variables and the VAR model. Researchers may find other variables and methods more useful and may provide findings accordingly.

Practical implications Since the results are quite asymmetric, it would be interesting for the market players, policymakers and regulators to consider the findings and explore appropriate opportunities.

Originality/value While the relationship between macroeconomic variables and stock market indices has been widely examined, a significant gap in the literature remains concerning the role of exchange rate variable on the stock market in an emerging economy context.