O ct 2 01 6 Numerical study of splitting methods for American option valuation

This paper deals with the numerical approximation of American-style option values governed by partial differential complementarity problems. For a variety of oneand 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.