This study investigates sensitivity of banking sector stock returns to interest rate. The study employs daily stock returns of seventeen commercial banks listed at Pakistan Stock Exchange, covering ten years period from 2010-2019. For data analysis Autoregressive Conditional Heteroscedasticity (ARCH) based statistical models are applied including GARCH-M, EGARCH and DCC-GARCH. The sample of banks considered for the study is divided into three categories i.e. Large banks (LGB), Second-tier banks (STB) and Third-tier banks (TTB). The three portfolios allows to investigate level of sensitivity of banks to interest rate, depending upon their size and the maturity gap between their assets and liabilities. Findings of this study suggest that bank stock returns are sensitive to changes in interest rate, the direction of effect is positive and the magnitude of interest rate sensitivity is portfolio-specific. Besides, it is also found that the market wide movement do affect stock returns. The thesis provides an insight into the nature of relationship and sensitivity level that bank stock returns exhibit vis-à-vis monetary policy as per their respective balance sheet profile. Supervisor:- Dr. Ahmed Fraz