![]() This surge in size provides a great opportunity to tap a very interesting source of volatility information. According to data from Skew Footnote 2, the total number of outstanding contracts (open interest) has more than tripled from its 2019 value, reaching a market size above USD 1 billion for the first time in mid-2020. This is, since cryptocurrency options were introduced in 2016, market liquidity and participation has improved significantly. In contrast to traditional indices, extracting reliable volatility information from options requires a broad spectrum of high-quality data, which for cryptocurrencies only became available very recently. These price or return indices are complimented by risk benchmarks, most famously CBOE’s Volatility Index (VIX), colloquially dubbed the ‘fear index’, which is designed to capture expected volatility. S&P 500 and Euro Stoxx 50, for instance, are two large indices that track North American or European stocks respectively. Furthermore, indices that are turned into tradable assets and derivatives thereon improve market accessibility. The latter reflects the market’s expectation of future volatility, in the sense that it is calculated from today’s price for hedging future volatility risk.Ī very important benchmark and investment tool are financial indices, which allow investors to obtain information on the current state of the market. This paper considers two kinds of volatility: first, historical volatility that is calculated from previous prices of the underlying second, implied volatility that is inferred from current market prices of options. We are interested in extracting volatility information from this unique type of market. Option markets can hence also be seen as markets for volatility. The dynamic nature of an option replication is directly linked to the underlying’s volatility during the lifetime of the contract. Options-like other financial derivatives-are tied to their underlying by an arbitrage relationship, which is based on the replication of the options’s cash-flow. Following the introduction of future contracts, i.e., the mutual obligation to exchange some amount of the underlying (e.g., Bitcoin) at a fixed price in the future, investors nowadays have access to option contracts, a type of derivative that gives the buyer the right to receive (call option) or deliver (put option) some amount of the underlying for a fixed price (strike) at some future point in time. Naturally, as cryptocurreny spot markets evolve, markets for derivatives thereon follow. We set out to explore volatility and tail-risk in the crypto space by computing benchmarks that are tailored to this young asset class. ![]() Volatility, as a measure of the variability of an asset over time, is the most common risk measure in financial theory. As of 2021, the crypto domain can be considered one of the most volatile markets available to investors. Since Nakamoto ( 2008) proposed Bitcoin as a peer-to-peer electronic cash system, this and other cryptocurrencies Footnote 1 have evolved into a new class of financial assets.
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