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The Fourier Cosine Method for Discrete Probability Distributions

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  • Xiaoyu Shen
  • Fang Fang
  • Chengguang Liu

Abstract

We provide a rigorous convergence proof demonstrating that the well-known semi-analytical Fourier cosine (COS) formula for the inverse Fourier transform of continuous probability distributions can be extended to discrete probability distributions, with the help of spectral filters. We establish general convergence rates for these filters and further show that several classical spectral filters achieve convergence rates one order faster than previously recognized in the literature on the Gibbs phenomenon. Our numerical experiments corroborate the theoretical convergence results. Additionally, we illustrate the computational speed and accuracy of the discrete COS method with applications in computational statistics and quantitative finance. The theoretical and numerical results highlight the method's potential for solving problems involving discrete distributions, particularly when the characteristic function is known, allowing the discrete Fourier transform (DFT) to be bypassed.

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  • Xiaoyu Shen & Fang Fang & Chengguang Liu, 2024. "The Fourier Cosine Method for Discrete Probability Distributions," Papers 2410.04487, arXiv.org, revised Oct 2024.
    • Handle: RePEc:arx:papers:2410.04487
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    References listed on IDEAS

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    1. Junike, Gero & Pankrashkin, Konstantin, 2022. "Precise option pricing by the COS method—How to choose the truncation range," Applied Mathematics and Computation, Elsevier, vol. 421(C).
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    5. Gero Junike, 2023. "On the number of terms in the COS method for European option pricing," Papers 2303.16012, arXiv.org, revised Mar 2024.
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