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HiI am working on some project related to pricing asian option under volatility skew. I read some article on Arithmetic Asian option pricing and understood how they reduced dimension to get 1 dim PDE when they assme Levy process or Independent Increment process(Including GBM or Merton Jump model). I am wonderingif there are some ways to do these techniques under the assumption that volatiliy is local (or stochastic)Thanks.

You should read the paper by Benhamou and Duguet, It's downloadable from WOPEC.Their technique is also valid in the prescence of a displacement, I discuss this in my paper on replicating exotics which can be downloaded from www.rebonato.comMJ

MJ,Thanks a lot!I will read both papers.ksdt