A transform-based method for pricing Asian options under general two-dimensional models

We propose a unified transform-based method, which we call the extended double spiral (EDS) method, for pricing arithmetic Asian options under general two-dimensional (2D) models that nest regime-switching Lévy models, stochastic volatility (SV) models with Lévy jumps, and time-changed Lévy models. We first construct a new single backward induction in the state space that relaxes the restriction of the independent increments of the log-asset price. Second, we build an exact and explicit double backward induction in the Fourier space based on this single backward induction, a combination of the 1D Fourier transform method and a key function characterizing the 2D model, and the double spiral method. Third, we develop a unified EDS algorithm to recursively implement this double backward induction via the fast Fourier transform (FFT), various quadrature rules, asymmetric truncation boundaries, and so on. Extensive numerical results across a broad class of 2D models, monitoring frequencies, option moneyness, and model parameters demonstrate that our method is remarkably accurate, efficient, robust, simple to implement, and widely applicable.