What is a jump diffusion?
Jump diffusion is a type of model used to assess or price of options. It mixes two price techniques: a more traditional diffusion model in which factors play a smooth and relatively consistent way, and a jump model in which one -time events can cause a major change. The theory is that the diffusion of a jump creates a more realistic picture of how the markets behave. This is a financial agreement according to which one trader buys the right to complete the sale or purchase of assets at a fixed price on the future date, but is not forced to complete the stock exchange. Different models try to calculate different factors that affect how valuable this contract is for the holders. They may include the current price of the underlying asset, the volatility of the asset price and the time until it can be repaid. Many traders use the price model to decide what price they can pay for and get a good balance of value between money they can earn from the possibility and the risk that it would not be appropriate to exercise this option and thus loseEt purchase price.
The most common forms of options can be described as diffuse -based. This works on the basis of the fact that market events will have a relatively small impact on assets and general trends and formulas. The most famous form of diffusion-based options is the Black-Scholes model. The main advantage is that such a model can be relatively simple and direct operation.
The contrasting type of model is known as the jump process. This works on the basis of the fact that the markets are continuously moving in a general smooth direction with small deviations, but rather are much more susceptible to dramatic changes in direction and pace through one -off events. Models using a jump process, such as a model of binomic options, try to take more into account the potential for unpredictable events. This causes a more complicated model, although the less time remains until the possibility comes, the smaller the difference between the valuesCreated, for example, by Black-Scholes awards and binomial options.
Ekonom Robert C. Merton has developed a mixture of these two models known specifically as the Merton model and generally as a model of the jump. They try to cover the idea that markets have a combination of general trends, smaller everyday variations and main shocks. Merton's work on the diffusion of Jump was later incorporated into the adapted Black-Scholes model, which won a new prize for the economy in 1997.