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Cryptocurrency Volatility Index

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Excerpt

Whenever traders want to assess the stock market’s mood, there is one really popular and useful index the most of them turn to. Yes, you guessed it right, it’s CBOE’s VIX Index. And which index can we use if we want to determine the mood of the cryptocurrencies? We can turn to a paper written by Fabian Woebbeking, which offers the methodology to compute two cryptocurrency volatility indexes (CVX & CVX76). The CVX and CVX76 Indexes also extract the market’s expectation of future volatility from option prices, but from options on the Bitcoin. The research suggests that the cryptocurrency option market has finally reached a sufficient market size to extract stable cryptocurrency volatility information.

Authors: Fabian Woebbeking

Title: Cryptocurrency Volatility Markets

Linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3639098

Abstract:

In this paper we compute a cryptocurrency volatility index (CVX) that extracts the market’s expectation of future volatility from option prices. Our method addresses the challenging liquidity environment of this young asset class and allows us to extract stable market implied volatilities. Calculations are based on two potential index methodologies, using granular intra-day cryptocurrency options data, which spans over several months and includes the COVID-19 pandemic period. CVX data therefore captures `normal’ market dynamics as well as a distress and recovery period. Comparing our data to existing volatility benchmarks for traditional asset classes, such as VIX (equity) or GVX (gold), shows that cryptocurrency volatility dynamics are often disconnected from traditional markets, yet, share common shocks..

Notable quotations from the academic research paper:

“Figure 3 shows the expected Bitcoin volatility in hourly frequency as captured by CVX and CVX76. CVX is the model free annualized expected volatility over the next 30-days, which is based on mid-prices for Bitcoin options (see Section 3.2). CVX76 is based on the Black 76 model implied volatility and interpolated from a volatility surface for each timestamp in the data (see Section 3.3). Both indices are based on the same option data.

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