Pricing cryptocurrency options

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JournalJournal of Financial Econometrics
DateAccepted/In press - 9 Mar 2020
DatePublished (current) - 15 May 2020
Issue number2
Volume18
Number of pages30
Pages (from-to)250-279
Original languageEnglish

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.

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© The Author(s) 2020

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