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 \cite{bandi2016price}. 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.
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 \cite{bandi2016price}. 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.
| Original language | English |
|---|---|
| Pages (from-to) | 250-279 |
| Number of pages | 30 |
| Journal | Journal of Financial Econometrics |
| Volume | 18 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 15 May 2020 |