Pricing virtual currency-linked derivatives with time-inhomogeneity

Yu-Min Lian and Jun-Home Chen

International Review of Economics & Finance, 2021, vol. 71, issue C, 424-439

Abstract: In this study, we provide a theoretical exploration of cryptocurrency option pricing under the presence of regime-switching cryptocurrency prices with jumps and state-dependent interest rates. The properties of cryptocurrency returns are empirically investigated, and the European-style cryptocurrency options are priced when the dynamics of the cryptocurrency price and the instantaneous forward interest rate are, respectively, driven by a two-factor, state-dependent stochastic volatility model with jumps and a state-dependent Heath-Jarrow-Morton model. Under an incomplete market setting, we employ a dynamic measure change technique to determine a pricing kernel and state-dependent risk premiums and then derive the option pricing formula. Numerical illustrations verify the superior pricing performance of proposed model over competing models, and empirical results show the fitness of the proposed model.

Keywords: Cryptocurrency option; Two-factor; State-dependent stochastic volatility model with jumps; State-dependent heath–jarrow–morton model; Forward interest rate; Dynamic measure change (search for similar items in EconPapers)
JEL-codes: C15 E32 G01 G12 G13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:71:y:2021:i:c:p:424-439

DOI: 10.1016/j.iref.2020.09.015

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