Do Recent Stochastic Tools Help to Better Understand Investors’ Preference and Asset Allocation?

In this study, we contribute to the literature of stochastic dominance by studying the effect of generalized first and second order stochastic dominance changes on returns distribution of financial time series. This paper contributes to the existing literature by investigating how recent developments in stochastic dominance can be implemented to better understand the statistical characteristic of distributions associated with traded financial assets. In particular, we assess the impact of a shock which occurs in the evolution of a time series on the investors preferences based on data from European developed and emerging stock markets. We show that stochastic dominance tools form a useful tool in risk aversion analysis and asset allocation.