Price dynamics and volatility jumps in bitcoin options

In the FinTech era, we contribute to the literature by studying the pricing of Bitcoin options, which is timely and important given that both Nasdaq and the CME Group have started to launch a variety of Bitcoin derivatives. We fnd pricing errors in the presence of market smiles in Bitcoin options, especially for short-maturity ones. Long maturity options display more of a "smirk" than a smile. Additionally, the ARJI-EGARCH model provides a better overall ft for the pricing of Bitcoin options than the other ARJI-GARCH type models. We also demonstrate that the ARJI-GARCH model can provide more precise pricing of Bitcoin and its options than the SVCJ model in term of the goodness-of-ft in forecasting. Allowing for jumps is crucial for modeling Bitcoin options as we fnd evidence of time-varying jumps. Our empirical results demonstrate that the realized jump variation can describe the volatility behavior and capture the jump risk dynamics in Bitcoin and its options.