The Effect of 9/11 on the stock market volatility dynamics: Empirical evidence from a front line state

Did the terrorist attacks of September 11, 2001 change the volatility dynamics of stock markets? Using daily returns data from Pakistan, a front line state in the war against terror, we investigate whether important time series characteristics, for example first-order time dependence in the mean and conditional variance, the conditional variance risk premium, and the asymmetric response of the conditional variance to innovations, have changed during the post-9/11 period in comparison to these characteristics during the pre-9/11 period. Our results show that the volatility behavior changed significantly after the terrorist attacks of 9/11. We show that this sudden shift in the volatility behavior cannot be explained by the implementation of regulatory reforms. We divide pre-9/11 period into the pre- and the post-reform periods and show that the volatility behavior during both of these periods was qualitatively the same.