Name of Quantlet: 'Option-Risk-Premia'
Published in: 'TBD'
Description: 'We discuss the existence of a risk-free rate in crypto asset markets and derive a proxy. The proxy serves as a benchmark that beta-neutral portfolios should yield. Subsequently, we construct and evaluate the performance of beta-neutral option portfolios using a unique data set of executed transactions from Derbit, the largest Crypto Options Exchange. We find that the beta-neutral option portfolios, written on Bitcoin and Ether, are fairly priced for most levels of moneyness. However, the portfolios do not generate the appropriate theoretical returns for at-the-money instruments. We compare the risk-return characteristics to the late 90s equity markets and find, in a similar fashion as the results reported by Kapadia et al. (2001) and Shumway et al. (2000), the existence of high premia for at-the-money options. The effect holds after compensating for tail risk (market crash insurance) and transaction cost.'
Keywords: Bitcoin, Deribit, pricing kernel, risk aversion, speculation
Author: Julian Winkel, Wolfgang Karl Haerdle
Submitted: 20240218