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Bayesian analysis of Merton's jump-diffusion model Dong-jin Noh1 and Jaewook Lee†2 Department of Industrial and Management Engineering Pohang University of Science and Technology, KOREA Email: [email protected] [email protected] Abstract. This paper examines the Merton's (1976) jump-diffusion model using main world indices, currencies and commodity price indices. Markov chain Monte Carlo (MCMC) methods are exploited to provide effective estimators of the model. We found that estimates of jump sizes and jump intensities are particularly useful for identifying the effects of the parameters especially during the period of financial crisis, such as those in 1987, 1997 and 2008. There was a definite change between markets having different conditions. We found that they can be barometers of circumstance of the market. Keywords: Bayesian analysis, Markov chain Monte Carlo method, Merton's jump-diffusion model, Gibbs sampling † : Corresponding Author Topic area: Applied Statistics & Data Mining
