Pricing Kernels and Risk Premia implied in Bitcoin Options

Bitcoin Pricing Kernels (PK) are estimated using a novel data set from Deribit, one of the largest Bitcoin derivatives exchanges. The PKs improve the understanding of investor sentiment and risk premia. Bootstrap-based confidence bands are estimated in order to validate the results. Investors are heterogeneous in their risk profiles and preferences with respect to volatility and investment horizon. The empirical PKs turn out to be U-shaped for short-dated instruments and W-shaped for long-dated instruments. We find that investors are willing to pay substantial risk premia to insure themselves against short-term price movements. The risk premia are smaller for longer-dated instruments and their traders are risk averse. The shape of the empirical PKs reveals the existence of a time-varying risk-premia. Their shape also shows that Bitcoin is becoming an established asset class. All underlying code is available on quantlet.com and a corresponding courselet is available on quantinar.com