This study is aimed to investigate the causal relationship between exchange rates and Karachi Stock Exchange (KSE) 100 Index. The Jarque-Bera test was used to check normality of both the variables. The results indicated that data series of variables do not follow the normal distribution which further required checking the stationarity of variables for which the ADF test was used. The results suggested that at level variables are non-stationary but are stationary at first difference. Accordingly, Johansen Test of Cointegration was used to test longterm relationship between the variables which indicated absence of such relationship. Finally, Granger Causality Test was applied to check the causal relationship between the variables which showed that exchange rates do not Granger cause KSE 100 Index and vice versa.
Keywords: exchange rates, KSE 100 Index, stationarity, Johansen Test of Conitegration, Granger Causality test.