Modeling price dynamics, optimal portfolios, and option valuation for cryptoassets

Yuan Hu, W. Brent Lindquist, Frank J. Fabozzi

Research output: Contribution to journalArticlepeer-review

Abstract

The authors demonstrate the construction of an optimal dynamic portfolio of cryptoassets that minimizes either return variance or conditional value at risk. One can view such a portfolio as a minimum-risk index for this asset class. They carefully backtested the dynamic portfolio model and developed a fair valuation model for options based on a dynamic pricing model for the underlying cryptoasset index. They obtain the valuation by passing from the natural world to the equivalent martingale measure via the Esscher transform. The work underscores the need for a cryptoasset index–based exchange-traded fund, the development of derivatives, particularly for cryptoportfolio insurance purposes, and the development of (nearly) riskless rates for this asset class.

Original languageEnglish
Pages (from-to)75-93
Number of pages19
JournalJournal of Alternative Investments
Volume24
Issue number1
DOIs
StatePublished - Jun 2021

Keywords

  • Currency
  • Derivatives
  • Options
  • Quantitative methods
  • Statistical methods
  • VAR and use of alternative risk measures of trading risk

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