Jump process

From Wikipedia, the free encyclopedia
Jump to navigation Jump to search

A jump process is a type of stochastic process that has discrete movements, called jumps, with random arrival times, rather than continuous movement, typically modelled as a simple or compound Poisson process.[1]

In finance, various stochastic models are used to model the price movements of financial instruments; for example the Black–Scholes model for pricing options assumes that the underlying instrument follows a traditional diffusion process, with continuous, random movements at all scales, no matter how small. John Carrington Cox and Stephen Ross[2]:145–166 proposed that prices actually follow a 'jump process'.

Robert C. Merton extended this approach to a hybrid model known as jump diffusion, which states that the prices have large jumps interspersed with small continuous movements.[3]

See also[edit]


  1. ^ Tankov, P. (2003). Financial modelling with jump processes (Vol. 2). CRC press.
  2. ^ Cox, J. C.; Ross, S. A. (1976). "The valuation of options for alternative stochastic processes". Journal of Financial Economics. 3: 145. doi:10.1016/0304-405X(76)90023-4.
  3. ^ Merton, R. C. (1976). "Option pricing when underlying stock returns are discontinuous". Journal of Financial Economics. 3: 125–144. doi:10.1016/0304-405X(76)90022-2. hdl:1721.1/1899.