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

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. (C) 2020 International Association for Mathematics and Computers in Simulation (IMACS). Published by Elsevier B.V. All rights reserved.

Automated summary

This paper introduces a new regime-switching model where the volatility depends on asset prices, and interest rate and volatility are associated with regime changes. By deriving an equivalent martingale measure, the pricing of an arithmetic Asian option is achieved, along with proposing an efficient Monte-Carlo simulation method based on generating K-correlated standard normal random vectors. Numerical experiments confirm the success of this method in pricing arithmetic Asian options.