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arXiv · 2107.12447

Bitcoin option pricing: A market attention approach

Alvaro Guinea Julia·Alet Roux
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Abstract

A model is proposed for Bitcoin prices that takes into account market attention. Market attention, modeled by a mean-reverting Cox-Ingersoll-Ross processes, affects the volatility of Bitcoin returns, with some delay. The model is affine and tractable, with closed formulae for the conditional characteristic functions with respect to both the conventional and a delayed filtration. This leads to semi-closed formulae for European call and put prices. A maximum likelihood estimation procedure is provided, as well as a method for changing to a risk-neutral measure. The model compares very well against classical and attention-based models when tested on real data.

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Alvaro Guinea Julia, Alet Roux. 2021-07-26. Bitcoin option pricing: A market attention approach. https://arxiv.org/abs/2107.12447

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