Loss Choice or Model Choice? The Role of Forecast Level in Cryptocurrency Volatility Forecasting

Volatility forecasts are commonly evaluated with aggregate accuracy metrics such as RMSE and MAE, but these metrics can hide conditional failures that matter for risk management. This paper proposes a model-agnostic audit framework for evaluating whether volatility forecasts remain reliable across latent market regimes. We learn time-series representations of market-state windows, cluster them into regimes using only training information, assign regimes out of sample, and compare aggregate forecast behavior with regime-conditional bias, tail-underprediction, and underprediction-sensitive economic losses. Applied to daily volatility forecasting across cryptocurrency and ETF assets, the audit shows that models with competitive aggregate accuracy can still exhibit substantial regime-specific bias and severe tail underprediction. The results suggest that volatility forecasting should be evaluated not only by average error, but also by where and how forecasts become unreliable. Our framework shifts forecast evaluation from asking which model is most accurate on average to identifying the market regimes in which apparently accurate forecasts fail conditionally. Reproducibility: https://github.com/arthurchagas1/Latent-Regime-Bias-Auditing-for-Volatility-Forecasting

Cryptocurrency forecasting presents a distinctive combination of extreme cross-asset scale heterogeneity, non-stationary dynamics, and structural dependencies among Open, High, Low, and Close (OHLC) variables. We present CryptoL, a unified framework designed to address these challenges within multivariate time-series forecasting. CryptoL evaluates forecasting error in context-normalized coordinates within the RevIN pipeline, preventing inverse normalization from introducing an additional squared-scale weighting into the MSE objective. We formally characterize this effect through the empirical risk and parameter-gradient geometry, establishing the conditions under which large-scale assets can disproportionately influence shared-model optimization. Beyond loss-space normalization, CryptoL examines channel-independent and channel-dependent normalization for OHLC data, showing that a shared channel-dependent affine transformation preserves candle-order relations that independent channel transformations need not preserve. The framework further incorporates scale-adaptive numerical stabilization to reduce distortions caused by a fixed normalization constant across assets spanning many orders of magnitude, together with a soft feasibility loss that penalizes violations of the defining OHLC inequalities. Experiments across heterogeneous cryptocurrency assets evaluate these components through controlled ablations and demonstrate improvements in forecasting accuracy, training stability, and the frequency of financially valid OHLC predictions relative to the considered baselines. CryptoL therefore provides an integrated approach to scale-balanced optimization, structure-preserving normalization, numerical stabilization, and constraint-aware cryptocurrency forecasting.

We present a convolutional variational autoencoder for cryptocurrency implied-volatility surfaces, together with a deployable predictor that combines it with a quadratic smile re-fit through a deterministic per-tenor routing rule. Trained on 6,034 fully-filled hourly Binance Options surfaces of BTC and ETH spanning May-October 2023 and parameterised on a common $6 \times 7$ tenor-delta grid, the model attains a hidden-cell surface-completion RMSE in the 0.94-1.56 vol-point range across both markets and mask rates 10-50%. The hybrid predictor attains 0.83 vol points at 50% masking against 7.00 for the smile re-fit alone, an eightfold reduction obtained at no additional inference cost. Under structurally-correlated hole patterns that emulate the withdrawal of an entire tenor of strikes, the smile re-fit incurs 9.6-13.1 vol points of error while the learned model remains at 1.5-1.9, isolating a regime in which the generative model is the only viable predictor. Joint training on BTC and ETH improves the in-distribution model on both markets by 9-27% relative to the better-performing single-symbol counterpart, indicating a substantially shared vol-surface manifold across the two largest cryptocurrencies over the observation window. The hybrid is calendar- and butterfly-arbitrage-free at the listed strikes, a property that the parametric smile re-fit alone fails at high mask rates. The per-snapshot reconstruction error of the trained model flags the late-October ETF-anticipation rally and the August $17$, $2023$ flash crash as elevated-error periods without supervision. All training and evaluation infrastructure is released to support reproducible follow-on work.