Pricing discretely monitored Asian options under regime-switching and stochastic volatility models with jumps
The proposed in this article pricing approach can be applied in a unified framework to both floating and fixed strike Asian options under a wide range of bivariate models, including the regime-switching Lévy models, stochastic volatility (SV) models with Lévy jumps, and time-changed Lévy models. It relies on the adoption of the change-of-measure approach and a dimension reduction technique to reduce the additional state variables in the recursions of Asian option prices introduced by the path-dependent averaging payoffs. More precisely, the authors construct new backward recursions for Asian options that include floating and fixed strike payoffs under a wide range of regime-switching and stochastic volatility models with jumps. The combination of the Fourier-cosine series expansion and Gauss quadrature rule serves as an efficient numerical tool. The exponential convergence rate of the proposed model is proven theoretically and verified numerically via comprehensive error analysis. Section 5 describes the theoretical error analysis. Section 6 presents the details of the numerical experiments.
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