City Research Online

Introduction to Fast Fourier Transform in Finance

Černý, A. (2004). Introduction to Fast Fourier Transform in Finance. Journal of Derivatives, 12(1), pp. 73-88.

Abstract

The Fourier transform is an important tool in Financial Economics. It delivers real time pricing while allowing for a realistic structure of asset returns, taking into account excess kurtosis and stochastic volatility. Fourier transform is also rather abstract and therefore o§-putting to many practitioners. The purpose of this paper is to explain the working of the fast Fourier transform in the familiar bi nomial option pricing model. We argue that a good understanding of FFT requires no more than some high school mathematics and familiarity with roulette, bicycle wheel, or a similar circular object divided into equally sized segments. The returns to such a small intellectual investment are overwhelming.

Publication Type: Article
Additional Information: © 2017 Institutional Investor LLC. All Rights Reserved
Publisher Keywords: Fast Fourier transform, option pricing, binomial lattice, chirpz transform, GAUSS, MATLAB
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/16292
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