variance risk premium long
What it checks
When the variance risk premium (the gap between implied vol and recent realized vol) is in the top 20% of its yearly distribution, equities tend to rally over the next 2-4 weeks as the overpriced hedges unwind.
Mechanism
Variance Risk Premium (VRP) = (VIX/100)^2 minus trailing 30d realized variance of SPY. When VRP is in the top quintile of trailing 252d own-history, investors are paying an unusually high premium for downside protection — historically a +6-10%/yr forward equity-return signal as the implied-vol overpricing converges.
Signal rule
(VIX/100)^2 - 30d-realized-var, top quintile of trailing 252d own-history (T+1) -> LONG risk-on equity for 10/21 trading days.
Data dependencies
daily_pricesAdjusted-close OHLCV for every US-listed ticker; primary price feed.
vix_pricesWorker data table — see services/worker schema.
spy_pricesWorker data table — see services/worker schema.
Expected edge
- Paper alpha
- +6-10%/yr conditional
- Paper window
- T+1 to T+21d
+6-10%/yr on long equity conditional on top-quintile VRP (Drechsler-Yaron 2011).
Example tickers where this is likely to fire
Illustrative only — the signal fires based on the live data, not a fixed list.
Related families
vrp vix termMacroVIX term-structure slope (VIX9D / VIX vs VIX / VIX3M) is a coincident indicator of market regime. Stay long the stock when the term structure is in contango (VIX < VIX3M) — backwardation signals stress. Smoothing variants (raw vs 5-day rolling mean) sweep to find the cleanest version.
vix contango regime longMicrostructureWhen the VIX term structure is in steep contango (VIX/VIX3M < 0.95), vol-of-vol is low and short-dated implied vol premium is being paid by hedgers — a classic risk-on regime for equities. The literature documents +6-12%/yr return on the SPY long leg conditioned on steep contango vs the all-period baseline.
vix term structureMacroVX1/VX3 slope predicts S&P returns 5-20d. Steep contango → calm → drift up. Backwardation → vol-shock → underperformance.
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