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Practical Applications

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Practical Applications of The Bitcoin VIX and Its Variance Risk Premium

Carol Alexander and Arben Imeraj
Practical Applications 9 (2) DOI: https://doi.org/10.3905/pa.9.2.447
Carol Alexander
is a professor of finance at the University of Sussex Business School and visiting professor in the HSBC Business School at Peking University in the UK
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Arben Imeraj
is a PhD student in finance at the University of Sussex in the UK
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Abstract

In The Bitcoin VIX and Its Variance Risk Premium, published in the Spring 2021 issue of The Journal of Alternative Investments, Carol Alexander and Arben Imeraj (both of the University of Sussex) introduce the bitcoin volatility index. CryptoCompare now streams this index every 15 seconds, under the ticker BVIN. Alexander and Imeraj are the first to investigate the bitcoin variance risk premiums and the behavior of the term structure of fair-value variance swap rates. The authors collect price data on bitcoin derivatives traded on the Deribit exchange via its application programming interface. They construct a family of indexes for different maturities using the same methodology used by CBOE’s equity volatility index, the VIX. They describe the methodology, noting that it accounts for information in volatility skews but assumes no jumps in prices. They also compare the indexes with those created with an alternative technique that does not rely on the no-jump assumption. In addition, they explore the diversification potential of bitcoin variance through correlation matrixes with other assets’ volatility indexes, realized volatilities, and other variance risk premiums.

TOPICS: Currency, mutual funds/passive investing/indexing, statistical methods, performance measurement

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Practical Applications
Vol. 9, Issue 2
31 Oct 2021
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Practical Applications of The Bitcoin VIX and Its Variance Risk Premium
Carol Alexander, Arben Imeraj
Practical Applications Oct 2021, 9 (2) DOI: 10.3905/pa.9.2.447

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Practical Applications of The Bitcoin VIX and Its Variance Risk Premium
Carol Alexander, Arben Imeraj
Practical Applications Oct 2021, 9 (2) DOI: 10.3905/pa.9.2.447
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    • Abstract
    • Overview
    • Practical Applications
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    • CREATION OF THE BITCOIN VOLATILITY INDEX
    • INDEX AND RISK PREMIUM FEATURES
    • COMOVEMENT WITH OTHER ASSETS
    • Carol Alexander
    • Arben Imeraj
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