Drift Coefficient

The drift coefficient represents the average or deterministic rate of change of a stochastic process over time. In the context of stock prices, it reflects the expected return of the asset, often influenced by risk-free rates or dividend yields.

While the diffusion component of the process represents random noise, the drift provides the directional tendency of the price. Separating drift from volatility is important for accurately pricing derivatives.

In the Black-Scholes model, the risk-neutral drift is assumed to be the risk-free rate. It simplifies the modeling of expectations under risk-neutral probability measures.