The purpose of this study is to examine the impact of terrorism on stock markets of South Asia namely, Karachi Stock Exchange 100 index (Pakistan), Bombay Stock Exchange (India), Colombo Stock Exchange (Sri Lanka) and Chittagong Stock Exchange (Bangladesh). Monthly panel data has been used for the period of January 2000 to December 2016. Terrorism events happened during the period of 2000 to 2016 have been incorporated to examine the impact of terrorism on stock market returns of South Asia. DCC GARCH through R software is used to analyze the impact of terrorism on stock market returns and to analyze the spillover effect of terrorism in one country and on the stock markets of other countries of South Asia. The results indicate that terrorism has significant and negative effect on stock market returns of Pakistan, India and Bangladesh but insignificant in Sri Lanka. Results also shows that stock markets return of Pakistan, India, and Bangladesh are significant and positively correlated with each other except the Stock market of Sri Lanka.