Introduction: A financial crisis is often associated with a panic or a run on the banks, in which investors sell their assets

or withdraw money from savings accounts with the hope that the value of those assets will fall if they remain at a financial institution. The Financial crises have been existed since the presence of financial markets. They differ in their severity and measured according to the size of the companying economic conditions. The overall effect spread over other sectors and mainly affects the financial sector. During crises stocks volatility register high levels and stock prices drop strongly in both developed and developing markets. In emerging markets the effects are rapid, steep and prolonged (Patel and Sarkar, 1998). The term financial crisis is applied broadly to a wide variety of situations in which some financial institutions suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. The global financial crisis of 2008-2009: The current global financial crisis which started in the USA with the subprime mortgage crisis in early 2007, and grew into a global crisis in September 2008 is considered the most dramatic and harmful financial crisis since the great depression, as it extended to hit most of the developed and emerging financial markets and it has great impacts on the real economy (Bordo, 2008; Brunnermeier, 2009; Swagel, 2009). Major European, North American and Asian stock markets had fallen by large percentages during the crisis. The main reasons that led to the crisis were the monetary expansion in the USA in the period before 2007, the great capital inflow to the American securities mainly because Asian countries had invested in the US securities to peg their exchange rates and to hedge from their currencies depreciation, and the boom in the housing market which generated from the lax interest rate policy set by the Federal Reserve and the large capital inflow to the USA (Bordo, 2008; Brunnermeier, 2009; Orlowski, 2008). In South Asia, the second largest economy, Pakistan, faces serious vulnerability in the region. High fiscal and current account deficits, rapid inflation, low reserves, a weak currency, and a fragile economy put Pakistan in a very difficult situation to face the global financial crisis. Pakistan was also faced with political upheaval at that time (Muhammad Usman, 2010). Many studies have examined the relationship between stocks returns and volatility, but few have examined the behavior of stocks returns and volatility during crisis with the majority of work done on emerged markets. Olu Ajakaiye and Tayo Fakiyesi (2009) said that the financial crises has great impact on the economy of Nigeria. Al-Rjoub (2010) investigates the behavior of stock prices and volatility in
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Jordan documenting its relation with business cycles and financial crashes, in the period between 1992 and 2009 using the dates of international crises documented and specified in the literature. Gap / Justification of Study: There have been a number of studies Stock return volatility and market crises in emerging economies but most of them are in developed countries and where more efficient stock markets existed. However, the findings of those researches are different from each other and in conclusive. Pakistan is a developing country in the South Asia and the Karachi Stock Exchange is one of the important emerging markets in South Asian stock markets. Investment in the stock market is essential for developing an economy for any country. So the capital markets must provide enough relevant information to the investor for decision making. There has not been any study on Pakistani context in the published research till to date. Therefore this study fills the gap in existing literature by investigating the stock market return volatility and financial crises in emerging markets in Karachi Stock exchange. On the other hand this study will shed light on the issue of stock return volatility, providing helpful insights to stock market authorities and participants for their respective activities but it will also help accelerate development of Pakistani stock markets. Problem statement: To examine the stock returns volatility and financial crises in emerging economies. Objective of the study: The purpose of our study is to empirically examine stock returns behavior during financial crises for Pakistan and also to create awareness for the Pakistani investors during the financial crises or sudden shocks so that the investors invested carefully in the stock market.

Significance of the Study: Financial crises have been present since existence of financial markets. Financial markets are backbone of any country. Financial markets such as stock exchange play a very important role while judging the economy of any country. During the last few years, financial markets have faced many sudden crashes or crises all over the world and in Pakistan as well. Many studies have examined the relationship between stock returns and volatility, but few have examined the behavior of stock returns during crises with the most of work done on developed markets. The Stock returns behavior change around financial crises, it can help the investment world and the academics predict stock return behavior during crises.
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Research Questions: What is the effect of financial crises on stock returns volatility in Pakistan? Which index is more affected due to financial crises?

Delimitation: This study only takes into accounts the affect of financial crises on Karachi stock exchange. However, the other stock exchanges (e.g. Lahore stock exchange and Islamabad stock exchange) that can be relevant are ignored due to time constrant.

Literature Review
There were vast literature which examined the relationship between stock returns and conditional volatility, but the studies that examined the stock return behavior and changes in volatility during financial crisis were few. The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panic (crises) and many recessions were results of these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults (Kindleberger & Aliber, 2005, Laeven & Valencia, 2008). Samer AM Al-Rjoub, Hussam Azzam (2012) adopted the GARCH-M model to measure the financial crises by using dummy variables and suggested that crises in general negatively affect stock returns. He also examined that there is positive relationship between stock returns and its own volatility. Abdul Adamu (2010) says that, during the financial crises of 2008-2009, the stock returns are more volatile and the stock returns are less volatile before the crises. Leon (2007) examined the relation between stock returns and volatility in the BRVM (the regional stock market of the West African Economic and Monetary Union). He used EGARCH in mean framework assuming two distributions for error terms; the normal and the student, and weekly closing prices for ten of the most actively traded BRVM stocks. He found a positive but insignificant relationship between stock market return and volatility, and found that volatility change over the business cycles where it becomes higher during booms.

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Shin (2005) examined the impact of the Asian/Russian crisis on stock volatility and on the relation between stock return and volatility, using both a parametric and semi parametric GARCH-M model, and daily data which transformed into a weekly rate of returns to alleviate autocorrelation problem in 14 emerging markets. The study showed a positive but not significant (in most countries) relationship between expected stock returns and conditional volatility. Fang (2001) found that negative depreciation affect the stock returns and increase stock volatility by using Taiwan daily data and ARCH (3) in mean model; also he showed that stock return volatility increased during the Asian crisis. Aggarwal et al. (1999) used algorithm and GARCH model to determine the nature of events which apparently cause sudden changes in the volatility of emerging stock markets, and whether it tend to be global or local events, social, political, or economic ones. The data used in the study consist of daily stock market indices closing values transformed into weekly rate of returns to alleviate non-synchronous trading problems, and correlations due to noisy events problems for ten of the largest emerging stock markets plus six developed markets, in the period between May 1985 and April 1995. Choudhry (1996) studied the stock return volatility persistence in emerging markets before and after 1987 crash, using GARCH-M approach and monthly data from six emerging stock markets. He found changing in volatility before and after the crisis of October 1987, but these changes were not uniform and related to factors other than this crisis depending on individual markets. Schwert (1990) studied daily stock returns and volatility behavior during and around crisis, focusing on the crash of October 1987 whether it differ from the average for the previous crashes, using daily data from 1885 to 1987 and lagged return shocks simultaneously with lagged volatility measures plus lagged high-low spreads. The study showed that stock return volatility increases when stock prices collapse, also during business cycle recessions and bank crisis, which verify Schwert (1989) results. Schwert (1989) examined the behavior of stock prices and volatility in the USA documenting its relation with business cycles and financial crashes, in the period between 1834 and 1987. For that purpose he characterized the normal stock volatility behavior, and then he analyzed the sudden changes in volatility that related to the financial crisis and recessions. He found that stock return volatility increases after stock prices falling, during recessions around financial crisis. He also showed that stock markets respond deeply to the banking crisis, where stock prices fall before the major crisis, and stocks volatility increase after the major crisis. (Al-Rjoub (2004) finds that the change in volatility during crises can behave the positive and negative shift depends upon the Jordanian stock market. Shin (2005) examines the relationship between the stock return and volatility in emerging economies around the Asian/Russian crises
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and he found a significant impact of global crises on stock volatility behavior. Fang (2001) found that Taiwan stock return volatility increased during the Asian crises. Hammoudeh and Li (2008) study the behavior of stock returns volatility in Arab Gulf stock markets to examine stock market sensitivity to global, regional and local events. Aggarwal et al. (1999) examined the volatility of developing stock markets and compare it with some of developed market. Their results show that the stock prices decline and the volatility during crisis are larger in emerging market than it in developed market and it was the highest in the gulf countries.)

Theoretical framework:
Current Account deficit

Rapid Inflation

Financial Crises

Stock Return Volatility

Low Reserve

Weak Currency

Hypotheses: H1: There is negative relationship between stock return volatility and financial crises. H0: There is no relationship between stock return volatility and financial crises.

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Research Methodology:

Identification of variables: Stock returns: In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gain or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, or net income/loss.

Determination of stock returns:

Samer AM Al-Rjoub, Hussam Azzam (2012) used the following method to calculate the stock returns volatility. Returns are calculated by taking the first differences of the natural logarithms of closing price index, multiplied by 100: Rt= 100 (ln Pt - ln Pt-1)

Where Rt represents stock return at time t, Pt represents closing value of KSE index at time t, Pt-1 represents closing value of KSE index at time t - 1. Financial crises: The term financial crisis is applied broadly to a wide variety of situations in which some financial institutions suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Determination of financial crises: We will estimate the financial crises by dummy variables. A dummy variable (also known as an indicator variable) is one that takes the values 0 or 1 to indicate the absence or presence of some categorical effect that may be expected to shift the outcome. For example, in econometric time series analysis, dummy variables may be used to indicate the occurrence of

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wars, or major strikes. It could thus be thought of as a truth value represented as a numerical value 0 or 1.
GARCH Model

Our main objective in this study is to examine the behavior of stock returns and stock returns volatility in KSE during the crises. For this purpose we used GARCH model. As this model fits very well a wide variety of financial data and it has proven its usefulness in estimating conditional volatility in developed and emerging market. The ARCH model was first developed by Robert Engle in 1982, and then generalized as GARCH by Tim Bollerslev in 1986. ARCH family of models is particularly designed to model conditional variances. These models are extensively used in financial time series analysis, where the variance of the dependent variable is postulate to be a function of past values of the dependent and independent variables. In this study we use the crisis specification adopted by Mishkin (2002) where he defined stock market crash as 20 percent decline in the stock market, and the one adopted by Patel and Sarkar (1998) where they use a 35 percent or more fall in emerging stock market from its historical maximum as a definition of stock market crash, and we extend by adopting a third scenario to account only for the 2008-2009 crisis. For this purpose, we will use ARCH, GARCH-M model to estimate these variables. The data will consist of weekly closing prices for KSE indexes. Data covers the period from 2005 to 2010 as it is available from that date. The values of KSE indexes will be obtained from KSE web site. Population: The population of our study is the all three stock exchanges of Pakistan. Sampling strategy: We will use the stratified sampling technique. Unit of Analysis: The unit of analysis of our study is Karachi Stock Exchange. Statistical tests: We will use E-Views. .

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References: Samer AM Al-Rjoub, Hussam Azzam, (2012),"Financial crises, stock returns and volatility in an emerging stock market: the case of Jordan", Journal of Economic Studies, Vol. 39 Iss: 2 pp. 178 - 211 Al-Rjoub, S. (2010), Business cycles, financial crises, and stock volatility in Jordan stock exchange, International Journal of Economic Perspective, Vol. 5 No. 1 Dimitrios Tsoukalas, (2000),"An Autoregressive Heteroskedastic in the Mean (ARCHM) Analysis of International Stock Market Indexes", Managerial Finance, Vol. 26 Iss: 12 pp. 46 56. Muhammad Usman. (2010), Global financial crises: its impact on developing countries and lessons for Pakistan IPRI journal of X, no.1 (winter 2010): 93-118. Ajakaiye, O. & Fakiyesi, T. (2009). Global financial crisis Discussion paper 8: Nigeria, Oversea Development Institute, London. Floros, C. (2008), Modelling volatility using GARCH models: evidence from Egypt and Israel, Middle Eastern Finance and Economics, No. 2, pp. 31-41. Khedhiri, S. and Muhammad, M. (2008), Empirical analysis of the UAE stock market volatility, International Research Journal of Finance and Economics, No. 15, pp. 241-52. Malik, F. and Hassan, S. (2004), Modeling volatility in sector index returns with GARCH models using an iterated algorithm, Journal of Economics and Finance, Vol. 28 No. 2, pp. 211-25. Medeiros, M. and Veiga, A. (2009), Modeling multiple regimes in financial volatility with a flexible coefficient GARCH (1,1) model, Econometric Theory, Vol. 25, pp. 1-45. Bordo, M. (2008), An historical perspective on the crisis of 2007-2008, Working Paper, No. 14569, National Bureau of Economic Research, Cambridge, MA. Bordo, M. and James, H. (2009), The great depression analogy, Working Paper 15584, National Bureau of Economic Research, Cambridge, MA, December.

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