A Revision of the Merton Jump-Diffusion Model: A Simple, Explicit Formula

8 Pages Posted: 1 Jul 2019 Last revised: 25 Mar 2021

See all articles by Moawia Alghalith

Moawia Alghalith

University of the West Indies (UWI)

Date Written: June 30, 2019

Abstract


In this paper, we show that the Merton jump-diffusion model
and formula are somewhat cumbersome. In doing so, we provide a simple,
explicit formula that doesn’t require a computational method. Furthermore,
we introduce a new, simple method for solving partial differential-difference
equations.

Keywords: option pricing, Merton model, jump diffusion, closed-form solution, Black-Scholes PDE/formula

JEL Classification: G0, C0, C5, D5

Suggested Citation

Alghalith, Moawia, A Revision of the Merton Jump-Diffusion Model: A Simple, Explicit Formula (June 30, 2019). Available at SSRN: https://ssrn.com/abstract=3412520 or http://dx.doi.org/10.2139/ssrn.3412520

Moawia Alghalith (Contact Author)

University of the West Indies (UWI) ( email )

Trinidad and Tobago

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