Detecting Jump Risk and Jump-Diffusion Model for Bitcoin Options Pricing and Hedging

Kuo-Shing Chen and Yu-Chuan Huang
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Kuo-Shing Chen: Department of Accounting, Ming Chuan University, 250 Zhong Shan N. Rd., Sec. 5, Taipei 111, Taiwan
Yu-Chuan Huang: Department of Accounting Information, College of Business, Southern Taiwan University of Science and Technology, Tainan 710, Taiwan

Mathematics, 2021, vol. 9, issue 20, 1-24

Abstract: In this paper, we conduct a fast calibration in the jump-diffusion model to capture the Bitcoin price dynamics, as well as the behavior of some components affecting the price itself, such as the risk of pitfalls and its ambiguous effect on the evolution of Bitcoin’s price. In addition, in our study of the Bitcoin option pricing, we find that the inclusion of jumps in returns and volatilities are significant in the historical time series of Bitcoin prices. The benefits of incorporating these jumps flow over into option pricing, as well as adequately capture the volatility smile in option prices. To the best of our knowledge, this is the first work to analyze the phenomenon of price jump risk and to interpret Bitcoin option valuation as “exceptionally ambiguous”. Crucially, using hedging options for the Bitcoin market, we also prove some important properties: Bitcoin options follow a convex, but not strictly convex function. This property provides adequate risk assessment for convex risk measure.

Keywords: blockchain; convex risk measure; jump-diffusion model; fintech; option pricing (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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