Geometric Brownian Motion

Geometric Brownian Motion (GBM) is a mathematical model used to describe the random movement of prices in financial markets. It assumes that prices follow a continuous path influenced by two main factors: a consistent upward trend (like average market growth) and random fluctuations (reflecting unpredictability, such as news or events). This model suggests that while prices can rise or fall at any time due to various influences, their overall movement tends to follow a pattern over time, making it useful for assessing investment risks and options pricing. GBM is foundational in financial mathematics and stock market analysis.