Pricing Cryptocurrency Options: The Case of Bitcoin and CRIX

46 Pages Posted: 27 Apr 2018 Last revised: 13 Jul 2019

See all articles by Ai Jun Hou

Ai Jun Hou

Stockholm University

Weining Wang

Humboldt University of Berlin

Cathy Yi‐Hsuan Chen

University of Glasgow, Adam Smith Business School; Humboldt Universität zu Berlin

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Charles University; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Date Written: June 12, 2019

Abstract

Cryptocurrencies, especially Bitcoin (BTC), which comprise a new revolutionary asset class, have drawn extraordinary worldwide attention. The characteristics of the cryptocurrency/ BTC include a high level of speculation, extreme volatility and price discontinuity. In this paper, we propose a pricing mechanism based on a stochastic volatility with correlated jump (SVCJ) model and compare it to a flexible co-jump model by Bandi and Renò (2016) allowing for non-affine structure. The calibration 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 proposed pricing mechanism underscores the importance of jumps in the cryptocurrency derivatives markets.

Keywords: Cryptocurrency IndeX, CRIX, Bitcoin, Cryptocurrency, SVCJ, Option pricing, OCRIX

JEL Classification: C32, C58, C52

Suggested Citation

Hou, Ai Jun and Wang, Weining and Chen, Cathy Yi‐Hsuan and Härdle, Wolfgang K., Pricing Cryptocurrency Options: The Case of Bitcoin and CRIX (June 12, 2019). Available at SSRN: https://ssrn.com/abstract=3159130 or http://dx.doi.org/10.2139/ssrn.3159130

Ai Jun Hou (Contact Author)

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Weining Wang

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Cathy Yi‐Hsuan Chen

University of Glasgow, Adam Smith Business School ( email )

University Avenue
Glasgow, G12 8QQ
United Kingdom
01413305065 (Phone)

HOME PAGE: http://https://gla.cathychen.info

Humboldt Universität zu Berlin ( email )

Unter den Linden 6,
Berlin, 10117
Germany
03020935631 (Phone)
10099 (Fax)

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Unter den Linden 6
Berlin, D-10099
Germany

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