What Are the Main Limitations of the Original Black-Scholes Model in the Crypto Context? ⎊ Path

What Are the Main Limitations of the Original Black-Scholes Model in the Crypto Context?

The main limitations are the assumptions of constant volatility and a log-normal distribution of returns, which do not hold in the crypto market. Crypto assets exhibit high volatility skew (volatility is not constant across strikes) and fat tails (more extreme moves than log-normal predicts).

Also, the assumption of continuous trading is often violated.

What Is the Black-Scholes Model and Why Is It Less Ideal for Crypto Options?

What Is the Primary Difference in Assumptions between the Black-Scholes and the Bjerksund-Stensland Models?

Define “Fat Tails” in a Financial Distribution

How Does the Black-Scholes Model’s Assumption of Constant Volatility Fail to Capture the Volatility Smile?

How Do ‘Fat Tails’ in Asset Price Distributions Affect Option Pricing?

What Is the Key Assumption of the Black-Scholes Model regarding Volatility?

What Are the Main Limitations of the Original Black-Scholes Model in the Crypto Context?

What Are the Main Limitations of the Black-Scholes Model in the Crypto Market?