This dissertation investigated the impact of prolonging terrorist activities on stock returns. The first chapter discusses the background, problem statement, motivation, and significance of the study. The second chapter discusses the existing literature on the dissertation topic and at length discuss the different methodology used in earlier studies and critical conclusions are drawn from the studies. In the third chapter, evidence was drawn for the relationship between terrorism and stock market index from a frontline state in the war on terror. Monthly time series data for Terrorism from 2002 (Jan) to 2012 (Dec) was used to develop a Terror Impact Factor with Lingering Effect series (TIFL). This TIFL was used to see its effect on monthly stock returns of different sectors listed in Karachi Stock Exchange. Results demonstrated significantly mixed positive and negative impact of prolonged terrorism on stock prices of different sectors and had shown that market has not become insensitive to the prolonged terrorist attacks. In the fourth chapter we further investigated the impact of a terrorist attack on investors investment decisions whose investment horizons are different and vary from 1-2 day, 2-4 day, 4-8 day, 8-16 day, and 16-32 day horizon. Daily time series data for KSE100 index return and terror attacks from 1998 (Jan) to 2014 (Dec) was used. Wavelet decomposition technique was used to decompose daily data into different time horizon, and the relationship between two variables was estimated. Finding suggests that there is a significant negative relationship exist between the two studied variables, but it was also noted that the coefficients of the terror attack were very small which motivated to conclude no or very feeble effect of terrorism on stock market return. Chapter five used the same data set used in chapter four and investigated the impact of the terrorist attack of different intensity on stock market index return at different market conditions (bearish and bullish) using Quantile-on-Quantile regression. This study concluded that terror attacks are more significant when a market is performing well as compared to when a market is bullish. Finally, Chapter 6 present the conclusion of the research and discuss the limitations of research, the implication for investors, policy recommendation and future research direction.