Efficient Asian option pricing under regime switching jump diffusions and stochastic volatility models
J. Lars Kirkby () and
Duy Nguyen ()
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J. Lars Kirkby: Georgia Institute of Technology
Duy Nguyen: Marist College
Annals of Finance, 2020, vol. 16, issue 3, No 1, 307-351
Abstract Utilizing frame duality and a FFT-based implementation of density projection we develop a novel and efficient transform method to price Asian options for very general asset dynamics, including regime switching Lévy processes and other jump diffusions as well as stochastic volatility models with jumps. The method combines continuous-time Markov chain approximation, with Fourier pricing techniques. In particular, our method encompasses Heston, Hull-White, Stein-Stein, 3/2 model as well as recently proposed Jacobi, $$\alpha $$ α -Hypergeometric, and 4/2 models, for virtually any type of jump amplitude distribution in the return process. This framework thus provides a ‘unified’ approach to pricing Asian options in stochastic jump diffusion models and is readily extended to alternative exotic contracts. We also derive a characteristic function recursion by generalizing the Carverhill-Clewlow factorization which enables the application of transform methods in general. Numerical results are provided to illustrate the effectiveness of the method. Various extensions of this method have since been developed, including the pricing of barrier, American, and realized variance derivatives.
Keywords: Asian options; Jump diffusion; Stochastic volatility; Regime switching; Markov chain; CTMC; Fourier; Exotic option (search for similar items in EconPapers)
JEL-codes: C00 C02 G12 G13 (search for similar items in EconPapers)
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