6533b7d6fe1ef96bd12670d0

RESEARCH PRODUCT

Operator splitting methods for American option pricing

Samuli IkonenJari Toivanen

subject

Backward differentiation formulaMathematical optimizationPartial differential equationDiscretizationApplied MathematicsFinite difference methodSemi-elliptic operatorTime discretizationValuation of optionsComplementarity theoryLinear complementarity problemCrank–Nicolson methodOperator splitting methodAmerican optionMathematics

description

Abstract We propose operator splitting methods for solving the linear complementarity problems arising from the pricing of American options. The space discretization of the underlying Black-Scholes Scholes equation is done using a central finite-difference scheme. The time discretization as well as the operator splittings are based on the Crank-Nicolson method and the two-step backward differentiation formula. Numerical experiments show that the operator splitting methodology is much more efficient than the projected SOR, while the accuracy of both methods are similar.

yearjournalcountryeditionlanguage
2004-07-01Applied Mathematics Letters
10.1016/j.aml.2004.06.010http://dx.doi.org/10.1016/j.aml.2004.06.010