IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/110985.html

Hedging Cryptocurrency Options

Author

Listed:
  • Matic, Jovanka Lili
  • Packham, Natalie
  • Härdle, Wolfgang Karl

Abstract

The cryptocurrency (CC) market is volatile, non-stationary and non-continuous. Together with liquid derivatives markets, this poses a unique opportunity to study risk management, especially the hedging of options, in a turbulent market. We study the hedge behaviour and effectiveness for the class of affine jump diffusion models and infinite activity Lévy processes. First, market data is calibrated to SVI-implied volatility surfaces to price options. To cover a wide range of market dynamics, we generate Monte Carlo price paths using an SVCJ model (stochastic volatility with correlated jumps) assumption and a close-to-actual-market GARCH-filtered kernel density estimation. In these two markets, options are dynamically hedged with Delta, Delta-Gamma, Delta-Vega and Minimum Variance strategies. Including a wide range of market models allows to understand the trade-off in the hedge performance between complete, but overly parsimonious models, and more complex, but incomplete models. The calibration results reveal a strong indication for stochastic volatility, low jump frequency and evidence of infinite activity. Short-dated options are less sensitive to volatility or Gamma hedges. For longer-date options, good tail risk reduction is consistently achieved with multiple-instrument hedges. This is persistently accomplished with complete market models with stochastic volatility.

Suggested Citation

  • Matic, Jovanka Lili & Packham, Natalie & Härdle, Wolfgang Karl, 2021. "Hedging Cryptocurrency Options," MPRA Paper 110985, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:110985
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/110985/8/MPRA_paper_110985.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. is not listed on IDEAS
    2. Danial Saef & Odett Nagy & Sergej Sizov & Wolfgang Karl Härdle, 2025. "Correction: Understanding temporal dynamics of jumps in cryptocurrency markets: evidence from tick-by-tick data," Digital Finance, Springer, vol. 7(2), pages 297-297, June.
    3. Ben Jabeur, Sami & Gozgor, Giray & Rezgui, Hichem & Mohammed, Kamel Si, 2024. "Dynamic dependence between quantum computing stocks and Bitcoin: Portfolio strategies for a new era of asset classes," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    4. Carol Alexander & Ding Chen & Arben Imeraj, 2023. "Crypto quanto and inverse options," Mathematical Finance, Wiley Blackwell, vol. 33(4), pages 1005-1043, October.
    5. Felföldi-Szűcs, Nóra & Králik, Balázs & Váradi, Kata, 2024. "Put–call parity in a crypto option market — Evidence from Binance," Finance Research Letters, Elsevier, vol. 61(C).
    6. Elisa Al`os & Eulalia Nualart & Makar Pravosud, 2023. "On the implied volatility of Inverse options under stochastic volatility models," Papers 2401.00539, arXiv.org, revised Apr 2025.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:110985. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.