Bangladesh Development Studies Vol. XXXVIII, September 2015, No. 3 Stock Market Crash and Stock Return Volatility: Empirical Evidence from Dhaka Stock Exchange K. M. ZAHIDUL ISLAM * SAYED FARRUKH AHMED ** This paper empirically investigates the impact of stock market crash on the volatility of Dhaka Stock Exchange stock return of Bangladesh with GARCH-type framework by using data of daily closing stock price indices of (DSE General Index) over the period from 9 November 2004 to 31 July 2013. The results of GARCH-M (1,1) model conclude that conditional standard deviation is negatively related to the level of returns. While this result is not consistent with the theory of a positive risk premium on stock indices, in special circumstances investors may not claim higher risk premium if they are competent enough to bear risk at times of specific volatility. Moreover, the model also confirms that stock market crash affected the volatility of DSE General Index return and there is a propensity for the volatility to erode over time. Keywords: Dhaka Stock Exchange, Volatility, Crash, GARCH, Bangladesh JEL Classification: C22, C52, G12, E32 I. INTRODUCTION Stock market crash is an intense and unanticipated decline of stock market prices for a short period of time which makes market participants panicked and causes significant investment losses to investors. A stock market crash has unpleasant impact on capital which may have long term or permanent effect on the investment climate of the country. It may erode public confidence gradually to invest in stock market. When stock markets crash, everyone becomes very worried, everyone wants to sell and nobody wants to buy in anticipation of further fall in prices. At the individual level, many investors may remain under constant panic and a sense of severe anguish may work in them. When an investor observes that her portfolio has dropped in value, she may decide to pull * Associate Professor, Institute of Business Administration, Jahangirnagar University, Savar, Dhaka, Bangladesh. ** Assistant Professor, Faculty of Business & Economics, Daffodil International University, Dhaka, Bangladesh.