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Research

Crypto volatility risk premium: one proxy trial and a published null

By , Canli Capital

Short title: AlphaForge crypto VRP proxy lineage
Author: Arhan Canli, Founder, System Architect, and Quantitative Researcher, Canli Capital
Research system: ALPHAC / AlphaForge
Family key: crypto_volatility_risk_premium
Status: public research record; not peer reviewed; not an investment solicitation
Evidence date: 2026-08-22

Abstract

AlphaForge tested one preregistered BTC/ETH volatility-risk-premium timing rule from 2021-03-24 through 2026-06-01. It compared Deribit DVOL closes with a seven-day Yang–Zhang realized- volatility estimate, entered only when the spread exceeded two volatility points, charged 10 basis points on signal turnover, and evaluated 1,492 expanding-window out-of-sample days after a 365-day warmup. The proxy produced annualized Sharpe -0.633, Deflated Sharpe Ratio 0.000, PSR 0.066, skew -9.517, and raw kurtosis 132.65. It failed.

The diagnostic also illustrates why average variance premium is not timing alpha. BTC's mean DVOL-minus-realized spread was +0.044 and positive on 72.99% of days; an always-short variance proxy showed Sharpe 2.4818 but skew -5.4874. ETH's corresponding always-short proxy showed Sharpe 0.5309 and skew -10.6795. Those attractive averages coexist with catastrophic left tails. This family is not a sleeve, is not in an Alpaca account, and has no broker-reconciled forward record.

Claim boundary

This paper establishes the economic question, exact historical proxy, one charged identity, persisted null, and source hashes. It does not establish executable option P&L, option-surface history, capacity, live execution, expected maximum drawdown, forward Sharpe, or future return. DVOL is an index and the variance-swap expression is a signal-validity proxy. It omits the option strip, tradable quotes and sizes, strike interpolation, margin, hedging, jumps, and gap execution.

Mechanism and falsifiable hypothesis

Option-implied variance can exceed subsequently realized variance because sellers of convex downside insurance require compensation. Carr and Wu formalize model-free variance-swap rates and document variance risk premia (Review of Financial Studies). That literature is a prior, not validation of AlphaForge's data, timing rule, or execution.

The tested hypothesis was narrower: a large positive difference between DVOL and recent realized volatility should identify days when short-variance compensation exceeds crash and trading costs. The hypothesis is falsified if the preregistered timing return is negative, remains deeply left-skewed, or fails selection adjustment. All three occurred.

For currency i and day t, the implementation was:

VRP(i,t)      = DVOL(i,t) - YangZhangRV_7d(i,t)
signal(i,t)   = max(0, VRP(i,t) - 0.02)
gross(i,t+1)  = DVOL(i,t)^2 / 365 - log_return(i,t+1)^2
proxy_return  = signal(i,t) * gross(i,t+1) - 0.001 * abs(change(signal))

DVOL was stamped available after its source bar; realized volatility used only contemporaneously available OHLC. BTC and ETH proxy returns were equal weighted, normalized by a one-day-lagged expanding standard deviation, and scored only after the warmup. The direction was never inverted after seeing the result.

Complete trial accounting

The union contains exactly one identity in crypto_volatility_risk_premium:

Hypothesis key Configuration hash Observations Sharpe DSR Decision
bd4688c240711a16 99596bbb5b6f8e38 1,492 -0.633 0.000 fail

The run originally used a global trial count of 84. The current union contains 228 identities; the historical DSR cannot be reconstructed honestly from rounded summary statistics alone and is therefore labeled artifact-era evidence, not a current-union restatement. The identity remains charged to the union regardless of its failure.

Result and risk interpretation

Measure Persisted value
Annualized net proxy Sharpe -0.633
Artifact-era DSR / PSR 0.000 / 0.066
Skew -9.517
Raw kurtosis 132.65
OOS observations 1,492 days

No maximum drawdown was persisted for this summary-only proxy, so none is invented here. The extreme skew and kurtosis are more decision-relevant than the appealing always-short average. Timing failed to transform the premium into admissible expected return.

The historical proxy likely understates implementation difficulty. DVOL and seven-day realized volatility do not share a perfectly matched horizon; a variance-swap formula is not a fillable option strip; and the 10-basis-point signal-turnover charge is not a full options execution, hedging, and margin model. These limitations weaken positive claims. They do not rehabilitate a negative result.

Capacity, overlap, and sleeve decision

No options capacity sweep exists. There is no historical bid/ask surface, quote size, portfolio margin replay, delta-hedging ledger, or broker-reconciled forward option record. Capacity is unmeasured.

Short volatility is also not presumed diversifying. It can load on the same crash, liquidity, and deleveraging states that hurt carry and risky-asset trend books. The artifact left correlation against live sleeves pending; no independence claim is made.

Decision: FAIL / RESEARCH ONLY. Do not admit a VRP sleeve. A future return identity would need a separately preregistered, point-in-time options-surface implementation with executable quotes, defined-loss construction, hedging and margin costs, capacity, current-union deflation, and forward broker reconciliation. It would be a new charged trial, not a revision of this null.

Reproduction and authorship

  • scripts/exp2_crypto_vrp.py — frozen proxy construction and original measurement driver.
  • artifacts/exp2/20260625T094710Z/exp2_metrics.json — persisted historical report.
  • scripts/audit_crypto_vrp_family.py — deterministic ledger-to-report audit.
  • artifacts/research/crypto_vrp_family.json — generated family evidence packet.
  • /glassbox/crypto_vrp_family.json — public machine packet.
  • /glassbox/trial_packet_manifest.json — global identity join and remaining identity-level packet debt.

Reproduction requires the pinned AlphaForge environment and underlying Binance/Deribit data lake. The public packet exposes exact configuration, immutable keys, source paths, and SHA-256 hashes so that missing private market data is disclosed rather than confused with public byte reproducibility.

This research record and its ALPHAC implementation were authored and directed by Arhan Canli, Founder of Canli Capital. Authorship does not convert an internal result into peer review or independent verification.

Conclusion

The contribution is the rejection, not a strategy claim. A positive average crypto variance premium and a high naive Sharpe did not survive timing, costs, tail-risk inspection, or deflation. The honest sleeve count contributed by this family is zero.