The current issue and full text archive of this journal is available at http://aocrj.org/archive/ Academy of Contemporary Research Journal V II (IV), 175-181, ISSN: 2305-865X © Resource Mentors (Pvt) ltd (Publisher) Received: June 2013 Revised: September 2013 Accepted: October 2013 175 Social Relationship between Exchange Rate and Stock Prices, a Case on SAARC Economies Ijaz Hussain Bokhari bokhari.ijaz@gmail.com Argosy University Chicago, USA Abstract The dynamic linkage between exchange rate and stock prices has been subjected to extensive research for over a decade and attracted considerable attention from researchers worldwide during the crisis of 1997-98, global financial crises 2000-01 and 2007. The issue is also important from the viewpoint of recent large cross-border movement of funds. In global the issue is also gaining importance in the liberalization era. With this background, the present study will examine the causal relationship between returns in stock market indices and currency exchange rates in developed and developing economies. Introduction The global financial system is undergoing the process of gaining back its strength from the deepest financial collapse in the post- World War II era. The major global financial recessions were triggered at key industrialized and developed economies in association of similar factors Reinhart and Rogoff (2009) that concurred with the glaciating of integrated financial markets and also caused the collapse of international trade flows. However all significant financial crises, Argentina, 1994 Latin America, 1994 East Asian, 1997, Turkey, 2001 and global level financial crises 2000-01 and 2007 again imbues its destructive footprints on the face of global level integrated economies through one common phenomena that synchronized effects on currencies and stock prices. These concurrent effects have given the birth to new phenomena that raised key questions; which one of them is the leading indicator that influences the others to move? Theoretically, researchers fail to document sound conclusion on the direction and behavioral association between exchange rate movements and stock market indices. Literature has documented mix conclusions regarding the causal relationship between stock market indices and currency markets exchange rates. Dynamic linkage between currency exchange rates and stock market returns is the primary area of interest under this research study. Johansen’s Co-integration and Granger Causality tests will be applied in the study to explore the direction of causality between currency exchange rate markets and stock market returns of sample economies. Results will facilitate us in documenting the behavior and nature of currency exchange rates and the stock market indices in the sample economies of SAARC countries; these countries include: Pakistan, Bangladesh, India, Sri-Lanka and Nepal. Currency exchange rates of these economies have attained less than due attention from the practical and academic researchers to investigate possible factors causing the exchange rates to move in under developing economies. While the developing economies are more exposed to global disturbances, these economies might not be showing signs of stable currency exchange rates. Consequently, currency exchange rates of these economies frequently diverge from parity conditions. Hence, a greater economic stability in developing economies can only be made possible through better understanding of factors which cause exchange rate movements. Practical Objectives: Understanding the dynamic linkages between currency exchange rates and stock markets, this understanding will also facilitate the national as well as multinational organizations to manage their foreign exchange exposure? Portfolio investors can use this information into order hedge or speculate their returns on foreign investments. Regulatory authorities can ensure the pre-cautionary measures to save their markets from financial crises. Theoretical Objectives: To determine the nature of causal relationship between stock market indices and currency markets exchange rates of SAARC Economies. To find the common determinants of nominal exchange rates of sample economies. To determine the predictive capacity of different exchange rate models based on economic fundamentals and their comparison with Chartism based models.