The aim of this study is to examine the impact of interest rate news surprises on Islamic and conventional stocks in Pakistan from time period spanning 2011 to 2016. Event window of 11 days and an estimation window of 50 days for each event was constructed. ARIMA model is applied to calculate the estimated returns from estimation window (t–50). Abnormal returns were calculated by taking the difference of actual and estimated returns. Then abnormal returns were aggregated as cumulative abnormal returns (CAR) which showed an impact of monetary policy announcements on stocks returns. Further we decomposed interest rate into expected and unexpected interest rate by using hodrick Prescott filter to analyse the impact of interest rate news surprises on Islamic and conventional stock returns. Engle-Granger co-integration test was applied to check the long-term relationship between interest rate surprise and stock returns. The study found a significant impact of news surprises in Islamic and conventional stocks in Pakistan. The study also found that despite the low amounts of cash and debt holdings of firms comprising Islamic stock indices interest rate surprises tend to have the same or bigger impact on the returns of Islamic stocks relative to conventional stocks. Supervisor:- Dr. Hassan M. Mohsin