Abstract
It is a well-known phenomenon in financial markets that sudden, large movements in asset prices occur every now and then. This can happen for example after major news events. Already in 1976, Merton [63] proposed to add a jump term to the geometric Brownian motion in order to obtain a better model for the asset price evolution. The jumps are assumed to follow a compound Poisson process, so that they arrive randomly according to a Poisson process and their size is random as well compare for example [80]. When a jump occurs, the price of the asset is modelled by multiplying its price at the time instant just before the jump with a given positive random variable Y.
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in ’t Hout, K. (2017). Merton Model. In: Numerical Partial Differential Equations in Finance Explained. Financial Engineering Explained. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-43569-9_12
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DOI: https://doi.org/10.1057/978-1-137-43569-9_12
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