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Numerical study of splitting methods for American option valuation

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  • Karel in 't Hout
  • Radoslav Valkov

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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  • Karel in 't Hout & Radoslav Valkov, 2016. "Numerical study of splitting methods for American option valuation," Papers 1610.09622, arXiv.org.
    • Handle: RePEc:arx:papers:1610.09622
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    References listed on IDEAS

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    1. Tinne Haentjens & Karel J. in 't Hout, 2015. "ADI Schemes for Pricing American Options under the Heston Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(3), pages 207-237, July.
    2. Sam Howison & Christoph Reisinger & Jan Hendrik Witte, 2010. "The Effect of Non-Smooth Payoffs on the Penalty Approximation of American Options," Papers 1008.0836, arXiv.org, revised May 2013.
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