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Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods
Published on: September 19, 2012
Cryptocurrency volatility markets.
1Goethe University Frankfurt, Frankfurt, Germany.
We developed a cryptocurrency volatility index (CVX) to measure market expectations of future volatility, even in illiquid conditions. This new index reveals cryptocurrency volatility is often independent of traditional markets but can share common shocks.
Area of Science:
- Quantitative Finance
- Financial Econometrics
- Digital Asset Markets
Background:
- The cryptocurrency market, a nascent asset class, exhibits unique volatility characteristics.
- Assessing future volatility expectations in this market is challenging due to liquidity constraints.
- Understanding cryptocurrency volatility is crucial for risk management and investment strategies.
Purpose of the Study:
- To compute a stable and reliable volatility index (CVX) for the cryptocurrency market.
- To analyze cryptocurrency market's expectation of future volatility using option prices.
- To investigate the relationship between cryptocurrency volatility and traditional asset market volatility.
Main Methods:
- Developed two alternative methods to compute volatility from granular intra-day cryptocurrency options data.
- Calculated a cryptocurrency volatility index (CVX) addressing liquidity challenges.
- Utilized an error correction model on cointegrated index series to indicate market-implied tail-risk.
Main Results:
- Successfully extracted stable market-implied volatilities for cryptocurrencies, even during the COVID-19 pandemic.
- The computed CVX data captured normal market dynamics, as well as periods of distress and recovery.
- Found that cryptocurrency volatility dynamics are often disconnected from traditional markets (e.g., equity VIX, gold GVX).
- Identified that cryptocurrency markets can experience common shocks with traditional asset classes.
Conclusions:
- The novel CVX provides a robust measure of cryptocurrency market's expectation of future volatility.
- The CVX and its associated error correction model serve as valuable indicators for tail-risk in digital asset markets.
- Cryptocurrency volatility exhibits distinct dynamics from traditional assets but is not entirely isolated from global financial shocks.

