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Since the hijacked airliner attacks in the United States on Sept. 11, 2001, to the suicide blasts at night clubs in Bali in 2002 and the Madrid and London train bombings of 2004 and 2005 and a series of blast and attack in Pakistan, financial markets have reacted in a highly consistent pattern. In this study, we examined the effect of terrorist attack news on returns and volatility for the KSE100, oil and gas, financial and industry sector indexes. We employ the EGARCH model proposed by Engle and Victor (1993) as it allows good and bad news to have a different impact on volatility. Our results show that terrorist attack news has negative impact on the returns of all the sector indexes including the sector indexes. Such results are consistent with Karolyi and Martell (2005). However, these news increased the volatility of KSE100 index and financial sector index. We also find that the results of other sectors (oil and gas, industry) are not statistically significantly in respond to terrorist attack news, indicating that these type of news does not affect the volatility. Moreover, volatility asymmetry is negative in all of the sectors including KSE100 confirming leverage effect. Furthermore, persistence parameter beta is large for the sectors those are not affected by the terrorist attack news such as oil and gas and industry sector, indicating that the variance move slowly through time.

Stock Market Reaction to Terrorist Attacks: Empirical Evidence from Front Line State