Abstract
This study examines interrelationship in two financial variables of Pakistan i.e. stock prices and exchange rates during the period April 2001 to March 2009. Three exchange rates i.e. NEER,  REER and Rs/US Exchange rate as well as Stock Prices of Karachi Stock Exchange are used to explore the causal link. No long run relationship is found in all three cases which is consistent with  the previous studies. No evidence of short run causality is observed in NEER – Stock prices and REER – Stock Prices cases whereas unidirectional causal link from Rs/US$ to Stock prices  prevails in Pakistan which implies that information of exchange rate market helps the investors to foresee the trends of stock market prices.
Keywords: Exchange Rates; Vector Autoregressive; Cointegration; Ganger Causality