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A generalized antithetic variates Monte-Carlo simulation method for pricing of Asian option in a Markov regime-switching model

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  • Noorani, Idin
  • Mehrdoust, Farshid
  • Nasroallah, Abdelaziz

Abstract

In this paper, we introduce a regime-switching model, such that the volatility of the model depends on the asset price. In this model, the interest rate and the volatility are associated with regime changes. Since the market model has the arbitrage opportunity, we derive an equivalent martingale measure for pricing an arithmetic Asian option. To evaluate the price of an arithmetic Asian option, we propose an efficient variance reduction Monte-Carlo simulation method based on the generation of K-correlated standard normal random vectors. Numerical experiments confirm the success of this method.

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  • Noorani, Idin & Mehrdoust, Farshid & Nasroallah, Abdelaziz, 2021. "A generalized antithetic variates Monte-Carlo simulation method for pricing of Asian option in a Markov regime-switching model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 181(C), pages 1-15.
    • Handle: RePEc:eee:matcom:v:181:y:2021:i:c:p:1-15
    DOI: 10.1016/j.matcom.2020.09.011
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    1. Abbaspour, Manijeh & Vajargah, Kianoush Fathi & Azhdari, Parvin, 2023. "An efficient algorithm for pricing reinsurance contract under the regime-switching model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 211(C), pages 278-300.
    2. Mehrdoust, Farshid & Noorani, Idin & Hamdi, Abdelouahed, 2023. "Two-factor Heston model equipped with regime-switching: American option pricing and model calibration by Levenberg–Marquardt optimization algorithm," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 204(C), pages 660-678.
    3. Chih, Mingchang, 2023. "Stochastic stability analysis of particle swarm optimization with pseudo random number assignment strategy," European Journal of Operational Research, Elsevier, vol. 305(2), pages 562-593.
    4. Mehrdoust, Farshid & Noorani, Idin & Kanniainen, Juho, 2024. "Valuation of option price in commodity markets described by a Markov-switching model: A case study of WTI crude oil market," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 215(C), pages 228-269.

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