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Volatility Under Fire - Evaluating the Performance of Classical Option Pricing Models on Bitcoin

Friberg, Gustav LU (2025) NEKH01 20251
Department of Economics
Abstract
The rise of cryptocurrencies has reshaped the financial landscape, with Bitcoin emerging as the flagship digital asset. The market dynamics of Bitcoin exhibit extreme volatility, heavy tails and asymmetrical returns. The increasing mainstream acceptance of Bitcoin has spurred the development of cryptocurrency derivatives. The rapid growth of this emerging market has not yet been matched by sufficient scientific investigation. Researchers point to knowledge gaps regarding suitable pricing frameworks for digital assets and highlight the need for evaluation of pricing models. This underscores the necessity of comparative analyses between traditional and advanced pricing models. To address this research void, this thesis evaluates the... (More)
The rise of cryptocurrencies has reshaped the financial landscape, with Bitcoin emerging as the flagship digital asset. The market dynamics of Bitcoin exhibit extreme volatility, heavy tails and asymmetrical returns. The increasing mainstream acceptance of Bitcoin has spurred the development of cryptocurrency derivatives. The rapid growth of this emerging market has not yet been matched by sufficient scientific investigation. Researchers point to knowledge gaps regarding suitable pricing frameworks for digital assets and highlight the need for evaluation of pricing models. This underscores the necessity of comparative analyses between traditional and advanced pricing models. To address this research void, this thesis evaluates the performance of the Black-Scholes, Heston, and Merton models applied to Bitcoin index options. In doing so, this paper aims to identify which pricing framework most accurately reflects the market realities of Bitcoin. An option chain was used to calibrate the models and calculate the pricing errors. Based on the results, the conclusion is that the Merton model is the superior pricing framework for Bitcoin options. This study also shows that the Heston model significantly outperforms the Black-Scholes model on Bitcoin options. (Less)
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author
Friberg, Gustav LU
supervisor
organization
course
NEKH01 20251
year
type
M2 - Bachelor Degree
subject
keywords
Bitcoin, Option Pricing Models, Black-Scholes, Stochastic Volatility, Jump-Diffusion Models
language
English
id
9195809
date added to LUP
2025-09-12 09:07:57
date last changed
2025-09-12 09:07:57
@misc{9195809,
  abstract     = {{The rise of cryptocurrencies has reshaped the financial landscape, with Bitcoin emerging as the flagship digital asset. The market dynamics of Bitcoin exhibit extreme volatility, heavy tails and asymmetrical returns. The increasing mainstream acceptance of Bitcoin has spurred the development of cryptocurrency derivatives. The rapid growth of this emerging market has not yet been matched by sufficient scientific investigation. Researchers point to knowledge gaps regarding suitable pricing frameworks for digital assets and highlight the need for evaluation of pricing models. This underscores the necessity of comparative analyses between traditional and advanced pricing models. To address this research void, this thesis evaluates the performance of the Black-Scholes, Heston, and Merton models applied to Bitcoin index options. In doing so, this paper aims to identify which pricing framework most accurately reflects the market realities of Bitcoin. An option chain was used to calibrate the models and calculate the pricing errors. Based on the results, the conclusion is that the Merton model is the superior pricing framework for Bitcoin options. This study also shows that the Heston model significantly outperforms the Black-Scholes model on Bitcoin options.}},
  author       = {{Friberg, Gustav}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Volatility Under Fire - Evaluating the Performance of Classical Option Pricing Models on Bitcoin}},
  year         = {{2025}},
}