Pricing cryptocurrency options

Hou, A. J., Wang, W., Chen, C. Y.-H. and Härdle, W. K. (2020) Pricing cryptocurrency options. Journal of Financial Econometrics, 18(2), pp. 250-279. (doi: 10.1093/jjfinec/nbaa006)

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Cryptocurrencies (CCs), especially bitcoin (BTC), which comprises a new digital asset class, have drawn extraordinary worldwide attention. The characteristics of the CC/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 cojump model by Bandi and Renò (2016). The estimation results of both models confirm the impact of jumps and cojumps on options obtained via simulation and an analysis of the implied volatility curve. We show that a sizeable proportion of price jumps is significantly and contemporaneously anticorrelated 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 CC markets.

Item Type:Articles
Additional Information:This research is supported by the Deutsche Forschungsgemeinschaft through the International Research Training Group 1792 “High Dimensional Nonstationary Time Series” ( In addition, it has been funded by the Natural Science Foundation of China (fund number 71528008). A.J.H. acknowledges the financial support from the Jan Wallender and Tom Hedelius Foundation of Handelsbanken (P2019-0264). W.K.H. acknowledges the financial support from the Czech Science Foundation.
Glasgow Author(s) Enlighten ID:Chen, Professor Cathy Yi-Hsuan
Authors: Hou, A. J., Wang, W., Chen, C. Y.-H., and Härdle, W. K.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of Financial Econometrics
Publisher:Oxford University Press
ISSN (Online):1479-8417
Published Online:15 May 2020
Copyright Holders:Copyright © 2020 The Authors
First Published:First published in Journal of Financial Econometrics 18(2):250–279
Publisher Policy:Reproduced under a Creative Commons License

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