Purpose of this study is to investigate the stock return volatility and abnormal returns induced by terrorist attacks in the CSE. After September 11, 2001 terrorist attacks on U.S, a growing interest has been shown among researchers on the effects of terrorism on financial markets. Cam (2007) examined the U.S stock market efficiency and industry specific effect of terrorism during the events of September 11 terrorist attacks. Our study employs event study methodology to identify stock return abnormal volatility and abnormal return behaviour using GARCH approach developed by Bolleslev (1986). Current study contributes to the literature by extending GARCH abnormal volatility approach into abnormal return analysis in the context of CSE. Empirical findings of this study indicate that local terrorist attacks significantly increase the abnormal volatility and cumulative abnormal volatility in the Colombo Stock Exchange. The market showed significant negative abnormal returns on the day of attacks and next three consecutive days. Cumulative abnormal returns showed statistically significant negative trend consecutive 14 days after the attacks. Further analysis showed that during the initial period of terror activities the market did not show any abnormal behaviour. Investors have seen the terrorist organization and its activities as an unimportant local organization. Hence, investor reactions did not show much panic during this period. However, with the passage of time investor reaction showed that they have realized the real risk of investment in CSE. The behaviour of stock return volatility has important implication for risk management during the period of ongoing terror attacks in CSE.