Price dynamics and volatility jumps in bitcoin options

Kuo Shing Chen () and J. Jimmy Yang ()
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Kuo Shing Chen: Ming Chuan University
J. Jimmy Yang: Oregon State University

Financial Innovation, 2024, vol. 10, issue 1, 1-29

Abstract: Abstract In the FinTech era, we contribute to the literature by studying the pricing of Bitcoin options, which is timely and important given that both Nasdaq and the CME Group have started to launch a variety of Bitcoin derivatives. We find pricing errors in the presence of market smiles in Bitcoin options, especially for short-maturity ones. Long-maturity options display more of a “smirk” than a smile. Additionally, the ARJI-EGARCH model provides a better overall fit for the pricing of Bitcoin options than the other ARJI-GARCH type models. We also demonstrate that the ARJI-GARCH model can provide more precise pricing of Bitcoin and its options than the SVCJ model in term of the goodness-of-fit in forecasting. Allowing for jumps is crucial for modeling Bitcoin options as we find evidence of time-varying jumps. Our empirical results demonstrate that the realized jump variation can describe the volatility behavior and capture the jump risk dynamics in Bitcoin and its options.

Keywords: ARJI-GARCH models; Blockchain; Bitcoin options; FinTech (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1186/s40854-024-00653-z

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