What is DIFFUSION PROCESS?

A continuous, STOCHASTIC PROCESS where the market variable (e.g., a COMMON STOCK price or FOREIGN EXCHANGE rate) exists in continuous time and its probability density function is continuous; the variable changes on a random and continuous basis, and as the time interval becomes larger, uncertainty in the returns increases in a predictable fashion. The diffusion process is widely used in modeling the value of certain financial contracts, such as DERIVATIVES.

More On This Topic



Link to This Definition
Did you find this definition of DIFFUSION PROCESS helpful? You can share it by copying the code below and adding it to your blog or web page.
Written and fact checked by The Law Dictionary