Jump Diffusion: When Markets Jump Instead of Walk
Here is a thing that bothers every honest quant at some point. The lognormal random walk, the thing Black-Scholes is built on, assumes that stock prices move smoothly. Small steps. Continuous paths. Nice and clean. But if you have ever watched a market during a crisis, you know that prices do not always walk. Sometimes they jump. Chapter 57 of Wilmott’s book tackles this head on and introduces jump diffusion models.