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Pricing Cryptocurrency Options

Author

Listed:
  • Ai Jun Hou
  • Weining Wang
  • Cathy Y H Chen
  • Wolfgang Karl Härdle

Abstract

Cryptocurrencies (CCs), especially bitcoin (BTC), which comprises a new digital asset class, have drawn extraordinary worldwide attention. The characteristics of the CC/BTC include a high level of speculation, extreme volatility and price discontinuity. We propose a pricing mechanism based on a stochastic volatility with a correlated jump (SVCJ) model and compare it to a flexible cojump model by Bandi and Renò (2016). The estimation results of both models confirm the impact of jumps and cojumps on options obtained via simulation and an analysis of the implied volatility curve. We show that a sizeable proportion of price jumps is significantly and contemporaneously anticorrelated with jumps in volatility. Our study comprises pioneering research on pricing BTC options. We show how the proposed pricing mechanism underlines the importance of jumps in CC markets.

Suggested Citation

  • Ai Jun Hou & Weining Wang & Cathy Y H Chen & Wolfgang Karl Härdle, 2020. "Pricing Cryptocurrency Options," Journal of Financial Econometrics, Oxford University Press, vol. 18(2), pages 250-279.
    • Handle: RePEc:oup:jfinec:v:18:y:2020:i:2:p:250-279.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbaa006
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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