This research study analyses the role of size effect in detecting the pricing of risk, various volatility dynamics, and economic exposure of firm returns on the Pakistani stock market by employing monthly data for the period from 1998 to 2018. Three generalized autoregressive conditional heteroskedasticity models were applied: GARCH(1,1) for capturing different volatility dynamics, GARCH-M for pricing of risk, and EGARCH for asymmetric and leverage effect. The findings of the study are as follows: Firstly, the authors untie that pricing of risk is subject to considerable variations with respect to firm size. Secondly, in the process of detecting whether the firm size matters in the case of asymmetry and leverage effect, they find that it is indeed the case. Thirdly, size effect plays a substantial role in determining various volatility dynamics. Finally, they uncover that economic factors affect stock returns differently based on firm size, signifying the role of size effect.
