Bitcoin option pricing with a SETAR-GARCH model. Issue 6 (13th April 2021)

• Record Type: Journal Article
• Authors: Siu, Tak Kuen; Elliott, Robert J.
• Is Part Of: European journal of finance. Volume 27:Issue 6(2021)
• Page Start: 564
• Page End: 595
• Publication Date: 2021-04-13
• Subjects: Bitcoin options -- regime switching -- conditional heteroscedasticity -- conditional Esscher transform -- variance-dependent pricing kernel -- threshold autoregressive models; G12 -- G13 -- G32; Finance -- Periodicals; Finance -- Europe -- Periodicals; International finance -- Periodicals; 332.094
• DOI: 10.1080/1351847X.2020.1828962
• Languages: English
• ISSNs: 1351-847X

Abstract

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.