Numerical study of splitting methods for American option valuation

2016/10/30 by Hout, Karel in 't, Valkov, Radoslav
#Computational Finance (q-fin.CP) #FOS: Economics and business

paper · doi:10.48550/arxiv.1610.09622

Abstract

This paper deals with the numerical approximation of American-style option values governed by partial differential complementarity problems. For a variety of one- and two-asset American options we investigate by ample numerical experiments the temporal convergence behaviour of three modern splitting methods: the explicit payoff approach, the Ikonen-Toivanen approach and the Peaceman-Rachford method. In addition, the temporal accuracy of these splitting methods is compared to that of the penalty approach.

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