AMERICAN OPTIONS UNDER M-REGIME SWITCHING JUMP-DIFFUSION MODEL WITH IRRATIONAL BEHAVIOR

This article investigates the pricing problem of American options under a regime-switching jump-diffusion model that allows for non-optimal exercise policies, also known as irrational strategies. For this, an intensity function-based regime-switching jump-diffusion model is proposed to obtain more realistic results for American option prices in real financial markets. To solve the American options pricing problem under this model, a partial integral differential equation (PIDE) approach is employed. The time dependence of these equations is discretized using a finite difference method, and the value of the solution is approximated using radial basis functions (RBF). The derivative operation matrix corresponding to radial basis functions is utilized to transform the problem into a set of algebraic equations, and numerical results are presented to demonstrate the efficiency and accuracy of the proposed model and the applied method under the multi-states model.