%0 Journal Article %A Javier F. Navas %T Correct Calculation of Volatility in a Jump-Diffusion Model %D 2003 %R 10.3905/jod.2003.319217 %J The Journal of Derivatives %P 66-72 %V 11 %N 2 %X The jump-diffusion model as an extension of the Black-Scholes pure logarithmic diffusion process was first introduced by Merton and others in the 1970s. The underlying asset follows a regular diffusion, but occasionally experiences a large discrete jump of random size, whose arrival is governed by a Poisson process. To estimate the volatility parameters for a jump-diffusion process, it is important to take into account the impact of both random jump arrival and also the uncertainty over the size of a jump if it should occur. In this article, Navas points out that the influence of jump size uncertainty on stock volatility was left out by a number of the early, and some not-so-early, investigators. The effect on theoretical option values is not huge, but also not negligible, as the results presented here show. %U https://jod.pm-research.com/content/iijderiv/11/2/66.full.pdf