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Pricing Cryptocurrency Options
- Source :
- Journal of Financial Econometrics, Volume 18, Issue 2, Spring 2020, Pages 250 to 279
- Publication Year :
- 2020
-
Abstract
- Cryptocurrencies, especially Bitcoin (BTC), which comprise a new digital asset class, have drawn extraordinary worldwide attention. The characteristics of the cryptocurrency/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 co-jump model by Bandi and Ren\`o (2016). The estimation results of both models confirm the impact of jumps and co-jumps on options obtained via simulation and an analysis of the implied volatility curve. We show that a sizeable proportion of price jumps are significantly and contemporaneously anti-correlated 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 cryptocurrency markets.
- Subjects :
- Quantitative Finance - Statistical Finance
Subjects
Details
- Database :
- arXiv
- Journal :
- Journal of Financial Econometrics, Volume 18, Issue 2, Spring 2020, Pages 250 to 279
- Publication Type :
- Report
- Accession number :
- edsarx.2009.11007
- Document Type :
- Working Paper
- Full Text :
- https://doi.org/10.1093/jjfinec/nbaa006