Jump Models

As we delve into the structures of the asset price model, it's crucial to grasp the significance of understanding the separate handling of jumps. This understanding is not just important; it's significant. The diffusion coefficient introduces uncertainties to mimic the dynamics of the stock market, and while the log transformation can be a preliminary defense against sudden market movements, it’s never enough and statistically a not so correct method to handle jumps. In this chapter, we explore three such jump handling models – two of them are parametric and the third one is nonparametric. The urgency of understanding jumps in asset price models cannot be overstated, as it forms the basis of our financial modeling work and can significantly impact our forecasting accuracy.