Numerical Study of Splitting Methods for American Option Valuation

DOI10.1007/978-3-319-61282-9_20MaRDI QIDQ4626513zbMATH OpenOpenAlexFDO

Authors Karel J. in 't Hout, R. Valkov

Publication date 28 February 2019

Published in Novel Methods in Computational Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1610.09622

zbMATH Keywords

American option valuationnumerical splitting methods

Mathematics Subject Classification ID

Stopping times; optimal stopping problems; gambling theory (60G40) Numerical methods for partial differential equations, initial value and time-dependent initial-boundary value problems (65M99) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

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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Cites work

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Cited in

(3)

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