A Second-Order Tridiagonal Method for American Options under Jump-Diffusion Models

@article{Kwon2011AST,
  title={A Second-Order Tridiagonal Method for American Options under Jump-Diffusion Models},
  author={Yonghoon Kwon and Younhee Lee},
  journal={SIAM J. Scientific Computing},
  year={2011},
  volume={33},
  pages={1860-1872}
}
We propose an implicit numerical method for pricing American options where the underlying asset follows a jump-diffusion model. Using the fact that the prices of American options are given by linear complementarity problems (LCPs), we combine an implicit finite difference method with an operator splitting method. The proposed method is constructed on three time levels, and the operator splitting method is used to treat American constraints. We concentrate on the formulation of the numerical… CONTINUE READING