American options pricing under regime-switching jump-diffusion models with meshfree finite point method

Mohammad Shirzadi, Mohammadreza Rostami, Mehdi Dehghan and Xiaolin Li

Chaos, Solitons & Fractals, 2023, vol. 166, issue C

Abstract: In an incomplete market construction and by no-arbitrage assumption, the American options pricing problem under the jump-diffusion regime-switching process is formulated by a variational form of coupled partial integro-differential equations. In this paper, a valuation algorithm is developed for American options when the dynamics of underlying assets follow the regime-switching jump-diffusion processes. Using the fact that the price of an American option under jump-diffusion regime-switching processes is formulated by a collection of coupled variational partial integro-differential equations with the free boundary characteristic, we combine the moving least-squares approximation with an operator splitting method to treat American constraints. Numerical experiments with American options under three, five, and seven regimes demonstrate the efficiency and effectiveness of our computational scheme for pricing American options under the regime-switching models.

Keywords: Partial integro-differential equations; Regime-switching jump-diffusion processes; American options pricing; Meshfree methods; Moving least-squares method; Finite point method (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:166:y:2023:i:c:s0960077922010980

DOI: 10.1016/j.chaos.2022.112919

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