Bitcoin option pricing with a SETAR-GARCH model

Tak Kuen Siu*, Robert J. Elliott

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

This paper aims to study the pricing of Bitcoin options with a view to incorporating both conditional heteroscedasticity and regime switching in Bitcoin returns. Specifically, a nonlinear time series model combining both the self-exciting threshold autoregressive (SETAR) model and the generalized autoregressive conditional heteroscedastic (GARCH) model is adopted for modeling Bitcoin return dynamics. Specifically, the SETAR model is used to model regime switching and the Heston-Nandi GARCH model is adopted to model conditional heteroscedasticity. Both the conditional Esscher transform and the variance-dependent pricing kernel are used to specify pricing kernels. Numerical studies on the Bitcoin option prices using real bitcoins data are presented.

Original languageEnglish
Number of pages32
JournalEuropean Journal of Finance
Early online date8 Oct 2020
DOIs
Publication statusE-pub ahead of print - 8 Oct 2020

Keywords

  • Bitcoin options
  • conditional Esscher transform
  • conditional heteroscedasticity
  • regime switching
  • threshold autoregressive models
  • variance-dependent pricing kernel

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