Regression model
Merton Jump-Diffusion Model
The Merton Jump-Diffusion model, introduced by Robert C. Merton in 1976, extends Geometric Brownian Motion by adding sudden price jumps generated by a Poisson process. It captures the volatility smile and the fat-tailed return behaviour that standard Black-Scholes cannot explain, and is widely used in option pricing and risk management.
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Sources
- Merton, R. C. (1976). Option Pricing When Underlying Stock Returns Are Discontinuous. Journal of Financial Economics, 3(1–2), 125–144. DOI: 10.1016/0304-405X(76)90022-2 ↗