This paper applies cointegration and VAR modeling to evaluate the long-run relationship and dynamic interactions between the Malaysian equity market, various economic variables, and major equity markets of the US and Japan. From the analysis, we find evidence for cointegration among the variables. The variance decompositions and impulse-response functions generated from the VAR suggest the dominant influence of nominal variables, particularly the money supply on Malaysian equity prices. At the same time, variations in equity prices do contain some information on such nominal variables, as money supply and consumer prices, suggesting bidirectional causality between them. We also note from the results the significant role of international equity prices on Malaysian equity prices as well as on Malaysian economic variables. Interestingly, the nature of the long-run relationship and spillovers of disturbances in the two major markets to the Malaysian economy is different. From a policy point of view, to the extent that monetary authority can control money supply, it has to be very cautious in implementing monetary policy since it has repercussions on financial stability. Moreover, disturbances of two major financial markets need to be treated differently in the information set of policy-makers.