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Introduction to Fast Fourier Transform in Finance

Aleš Černý

Cass Business School

February 20, 2006

Cass Business School Research Paper

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 off-putting to many practitioners.

The purpose of this paper is to explain the working of the fast Fourier transform in the familiar binomial 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.

Number of Pages in PDF File: 29

Keywords: Fast Fourier transform, option pricing, binomial lattice, chirp-z transform

JEL Classification: C63, G12

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Date posted: June 29, 2004  

Suggested Citation

Černý, Aleš, Introduction to Fast Fourier Transform in Finance (February 20, 2006). Cass Business School Research Paper. Available at SSRN: http://ssrn.com/abstract=559416 or http://dx.doi.org/10.2139/ssrn.559416

Contact Information

Aleš Černý (Contact Author)
Cass Business School ( email )
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
HOME PAGE: http://www.cass.city.ac.uk/experts/a.cerny
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References:  26
Citations:  7

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