LETTERS TO S&C
FAST FOURIER AND SPECTRAL ANALYSIS
I am a student at The School of Business Economics, Aarhus, Denmark. Presently I am working on my
graduate report, which concerns the efficiency of the foreign exchange market. In order to detect
inefficiency in the market I have performed several statistical tests, including spectral analysis. None of
these tests have produced any significant results, however, and considering the fact that certain investors
and investment firms through the use of technical analysis have produced profits substantially larger than
could be expected under the efficiency hypothesis, it seems reasonable to test this method thoroughly.
Technical analysis is not yet a widely used method in currency forecasting in Denmark, but I have
managed to get in contact with perhaps the most experienced company in the country regarding this
matter, from whom I have borrowed a version of CompuTrac. The CompuTrac system contains a
procedure called Fourier analysis, which is described in the manual as a method based on a Fast Fourier
Transform used for detecting cycles, especially in commodities. In my statistical research I have, as
mentioned above, used spectral analysis, which is based on a Fourier transformation of the time series.
My question, then, is how do you use or how are the CompuTrac users supposed to use the method? In
essence, how do you interpret the three kinds of graphs produced by the Fourier analysis?