An exact and explicit formula for pricing Asian options with regime switching

2014/07/17 by Leunglung Chan, Chan, Leunglung, Song‐Ping Zhu +1
Economics, Econometrics and Finance · #FOS: Economics and business #Financial Markets and Investment Strategies #Financial Risk and Volatility Modeling #Pricing of Securities (q-fin.PR) #Stochastic processes and financial applications

paper · pdf · doi:10.48550/arxiv.1407.5091

openalex publication_date 2014/07/18 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

This paper studies the pricing of European-style Asian options when the price dynamics of the underlying risky asset are assumed to follow a Markov- modulated geometric Brownian motion; that is, the appreciation rate and the volatility of the underlying risky asset depend on unobservable states of the economy described by a continuous-time hidden Markov process. We derive the exact, explicit and closed-form solutions for European-style Asian options in a two-state regime switching model.

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