An IMEX predictor-corrector method for pricing options under regime-switching jump-diffusion models

An efficient second-order method for pricing European and American options under regime-switching jump-diffusion models is presented and analysed for stability and convergence. The implicit-explicit (IMEX) nature of the proposed method avoids the need to invert a full matrix and leads to tridiagonal systems that can be efficiently solved by direct methods. The IMEX predictor-corrector method is coupled with the operator splitting method to solve the linear complementarity problem of the American options. Numerical experiments are performed to demonstrate the stability and second-order convergence of the method.