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

• Published in: Chaos, solitons and fractals Vol. 166; p. 112919
• Main Authors: Shirzadi, Mohammad, Rostami, Mohammadreza, Dehghan, Mehdi, Li, Xiaolin
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.01.2023
• Subjects: American options pricing; Finite point method; Meshfree methods; Moving least-squares method; Partial integro-differential equations; Regime-switching jump-diffusion processes; 65K15; 65N35; 60J60; American options pricing; Finite point method; 65C40; Meshfree methods; Moving least-squares method; 45K05; 35R35; Partial integro-differential equations; Regime-switching jump-diffusion processes; 60J22
• ISSN: 0960-0779; 1873-2887
• DOI: 10.1016/j.chaos.2022.112919

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. •Applying the meshfree moving least-squares collocation for options pricing problem under the jump-diffusion regime-switching processes.•Applying the proposed method for pricing American options with the free boundary feature.•Computing hedge parameters of American options and early exercise boundary of American options with little extra cost via the proposed method.•Proposing numerical test problems for American options pricing with high regimes-switching (till seven regimes) assumption.