This paper investigates the feedback relationship between stock market returns and economic fundamentals in an emerging market. Starting from an intertemporal consumption-based CAPM (CCAPM), we obtain a restricted VAR model for stock returns and macroeconomic variables. We then apply this model to Korea and find statistically significant departures from the restrictions implied by CCAPM. Consequently, an unrestricted VAR model is used to analyze the variations of expected and unexpected returns in the Korean stock market. It is shown that the expected market returns vary with a set of macroeconomic variables, and that the predictable component is substantial. Reflecting richer dynamics in the data, relative to the usual single equation modeling in the literature, the estimated VAR model shows considerable predictive ability for both real economic activity and real returns. Using the model for a variance decomposition of unexpected returns, we find that, although we cannot directly observe the market's revision of expected future dividend growth, we can estimate a large part of the revision with the news in the expected industry output growth from our VAR model. Finally, we also find that economic fundamentals can explain only a small portion of the variation in unexpected returns in the Korean stock market. Copyright Kluwer Academic Publishers 1997