Implied volatility estimation of bitcoin options and the stylized facts of option pricing
Abstract The recently developed Bitcoin futures and options contracts in cryptocurrency derivatives exchanges mark the beginning of a new era in Bitcoin price risk hedging. The need for these tools dates back to the market crash of 1987, when investors needed better ways to protect their portfolios...
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| Format: | Article |
| Language: | English |
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SpringerOpen
2021-09-01
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| Series: | Financial Innovation |
| Subjects: | |
| Online Access: | https://doi.org/10.1186/s40854-021-00280-y |
| _version_ | 1818910049093812224 |
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| author | Noshaba Zulfiqar Saqib Gulzar |
| author_facet | Noshaba Zulfiqar Saqib Gulzar |
| author_sort | Noshaba Zulfiqar |
| collection | DOAJ |
| description | Abstract The recently developed Bitcoin futures and options contracts in cryptocurrency derivatives exchanges mark the beginning of a new era in Bitcoin price risk hedging. The need for these tools dates back to the market crash of 1987, when investors needed better ways to protect their portfolios through option insurance. These tools provide greater flexibility to trade and hedge volatile swings in Bitcoin prices effectively. The violation of constant volatility and the log-normality assumption of the Black–Scholes option pricing model led to the discovery of the volatility smile, smirk, or skew in options markets. These stylized facts; that is, the volatility smile and implied volatilities implied by the option prices, are well documented in the option literature for almost all financial markets. These are expected to be true for Bitcoin options as well. The data sets for the study are based on short-dated Bitcoin options (14-day maturity) of two time periods traded on Deribit Bitcoin Futures and Options Exchange, a Netherlands-based cryptocurrency derivative exchange. The estimated results are compared with benchmark Black–Scholes implied volatility values for accuracy and efficiency analysis. This study has two aims: (1) to provide insights into the volatility smile in Bitcoin options and (2) to estimate the implied volatility of Bitcoin options through numerical approximation techniques, specifically the Newton Raphson and Bisection methods. The experimental results show that Bitcoin options belong to the commodity class of assets based on the presence of a volatility forward skew in Bitcoin option data. Moreover, the Newton Raphson and Bisection methods are effective in estimating the implied volatility of Bitcoin options. However, the Newton Raphson forecasting technique converges faster than does the Bisection method. |
| first_indexed | 2024-12-19T22:36:37Z |
| format | Article |
| id | doaj.art-4b0e00c2018043bba93d89089f8aa942 |
| institution | Directory Open Access Journal |
| issn | 2199-4730 |
| language | English |
| last_indexed | 2024-12-19T22:36:37Z |
| publishDate | 2021-09-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj.art-4b0e00c2018043bba93d89089f8aa9422022-12-21T20:03:11ZengSpringerOpenFinancial Innovation2199-47302021-09-017113010.1186/s40854-021-00280-yImplied volatility estimation of bitcoin options and the stylized facts of option pricingNoshaba Zulfiqar0Saqib Gulzar1COMSATS University Islamabad - Wah CampusCOMSATS University Islamabad - Wah CampusAbstract The recently developed Bitcoin futures and options contracts in cryptocurrency derivatives exchanges mark the beginning of a new era in Bitcoin price risk hedging. The need for these tools dates back to the market crash of 1987, when investors needed better ways to protect their portfolios through option insurance. These tools provide greater flexibility to trade and hedge volatile swings in Bitcoin prices effectively. The violation of constant volatility and the log-normality assumption of the Black–Scholes option pricing model led to the discovery of the volatility smile, smirk, or skew in options markets. These stylized facts; that is, the volatility smile and implied volatilities implied by the option prices, are well documented in the option literature for almost all financial markets. These are expected to be true for Bitcoin options as well. The data sets for the study are based on short-dated Bitcoin options (14-day maturity) of two time periods traded on Deribit Bitcoin Futures and Options Exchange, a Netherlands-based cryptocurrency derivative exchange. The estimated results are compared with benchmark Black–Scholes implied volatility values for accuracy and efficiency analysis. This study has two aims: (1) to provide insights into the volatility smile in Bitcoin options and (2) to estimate the implied volatility of Bitcoin options through numerical approximation techniques, specifically the Newton Raphson and Bisection methods. The experimental results show that Bitcoin options belong to the commodity class of assets based on the presence of a volatility forward skew in Bitcoin option data. Moreover, the Newton Raphson and Bisection methods are effective in estimating the implied volatility of Bitcoin options. However, the Newton Raphson forecasting technique converges faster than does the Bisection method.https://doi.org/10.1186/s40854-021-00280-yBitcoin optionsDeribitBitcoin smileImplied volatility estimationNumerical estimation |
| spellingShingle | Noshaba Zulfiqar Saqib Gulzar Implied volatility estimation of bitcoin options and the stylized facts of option pricing Financial Innovation Bitcoin options Deribit Bitcoin smile Implied volatility estimation Numerical estimation |
| title | Implied volatility estimation of bitcoin options and the stylized facts of option pricing |
| title_full | Implied volatility estimation of bitcoin options and the stylized facts of option pricing |
| title_fullStr | Implied volatility estimation of bitcoin options and the stylized facts of option pricing |
| title_full_unstemmed | Implied volatility estimation of bitcoin options and the stylized facts of option pricing |
| title_short | Implied volatility estimation of bitcoin options and the stylized facts of option pricing |
| title_sort | implied volatility estimation of bitcoin options and the stylized facts of option pricing |
| topic | Bitcoin options Deribit Bitcoin smile Implied volatility estimation Numerical estimation |
| url | https://doi.org/10.1186/s40854-021-00280-y |
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