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Operator splitting schemes for American options under the two-asset Merton jump-diffusion model

Journal Contribution - Journal Article

This paper deals with the efficient numerical solution of the two-dimensional partial integro-differential complementarity problem (PIDCP) that holds for the value of American-style options under the two-asset Merton jump-diffusion model. We consider the adaptation of various operator splitting schemes of both the implicit-explicit (IMEX) and the alternating direction implicit (ADI) kind that have recently been studied for partial integro-differential equations (PIDEs) in [3]. Each of these schemes conveniently treats the nonlocal integral part in an explicit manner. Their adaptation to PIDCPs is achieved through a combination with the Ikonen–Toivanen splitting technique [14] as well as with the penalty method [32]. The convergence behaviour and relative performance of the acquired eight operator splitting methods is investigated in extensive numerical experiments for American put-on-the-min and put-on-the-average options.
Journal: Applied numerical mathematics
ISSN: 0168-9274
Volume: 153
Pages: 114 - 131
Publication year:2020
Keywords:A1 Journal article
BOF-publication weight:1
CSS-citation score:1
Authors from:Higher Education