Hedging Cryptocurrency Options

Jovanka Matic, Natalie Packham and Wolfgang Härdle

MPRA Paper from University Library of Munich, Germany

Abstract: The cryptocurrency (CC) market is volatile, non-stationary and non-continuous. Together with liquid derivatives markets, this poses a unique opportunity to study risk management, especially the hedging of options, in a turbulent market. We study the hedge behaviour and effectiveness for the class of affine jump diffusion models and infinite activity Lévy processes. First, market data is calibrated to SVI-implied volatility surfaces to price options. To cover a wide range of market dynamics, we generate Monte Carlo price paths using an SVCJ model (stochastic volatility with correlated jumps) assumption and a close-to-actual-market GARCH-filtered kernel density estimation. In these two markets, options are dynamically hedged with Delta, Delta-Gamma, Delta-Vega and Minimum Variance strategies. Including a wide range of market models allows to understand the trade-off in the hedge performance between complete, but overly parsimonious models, and more complex, but incomplete models. The calibration results reveal a strong indication for stochastic volatility, low jump frequency and evidence of infinite activity. Short-dated options are less sensitive to volatility or Gamma hedges. For longer-date options, good tail risk reduction is consistently achieved with multiple-instrument hedges. This is persistently accomplished with complete market models with stochastic volatility.

Keywords: Cryptocurrency options; hedging; bitcoin; digital finance; volatile markets (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2021-11-20
New Economics Papers: this item is included in nep-cwa, nep-ore, nep-pay and nep-rmg
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https://mpra.ub.uni-muenchen.de/110985/8/MPRA_paper_110985.pdf original version (application/pdf)

Related works:
Journal Article: Hedging cryptocurrency options (2023)
Working Paper: Hedging Cryptocurrency Options (2022)
Working Paper: Hedging Cryptocurrency Options (2021)
Working Paper: Hedging cryptocurrency options (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:110985

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