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DIFFUSION PROCESS Definition & Legal Meaning

Definition & Citations:

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.


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