IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2605.17142.html

On the Structural Foundations of Signature Volatility Models: Existence, Arbitrage, Completeness, and the Hedging-Error Decomposition

Author

Listed:
  • Akmal Xodarev

Abstract

We establish four structural results for signature volatility models. First, we prove global existence and uniqueness of strong solutions to the signature SDE $dS_t = S_t \langle \ell, \widehat{W}_t \rangle \, dB_t$ on the weighted tensor algebra $T_w$, identifying the admissibility class through a summability condition H1 and an exponential-integrability condition H3 for the square-integrable stochastic-exponential construction. Second, we establish the asset-pricing part on the natural filtration of the prolonged signature and separate it from transform non-explosion: H3 makes the reference-measure stochastic exponential a true martingale, hence yields NFLVR, while global solvability of the associated infinite-dimensional Riccati equation is the additional condition equivalent to absence of explosion for finite signature transforms. Third, we characterise market completeness on the price filtration via the density of the truncated signature span $\mathrm{span}\{\langle e_I, \widehat{W}_T \rangle : |I| \leq N\}$ inside $L^2(\mathcal{F}^S_T, \mathbb{Q})$, and identify the minimal such $N$, the price-filtration completeness depth. Fourth, we derive the hedging-error decomposition $X = \mathbb{E}_\mathbb{Q}[X] + \int_0^T H_s \, dS_s + \varepsilon_T$ for square-integrable payoffs, with residual expanded through the Gram projection of signature components beyond the completeness depth and bounded by a model-dependent projection error. The four results are tied by an architectural identity: the admissible weighted tensor algebra on which the stochastic exponential is a true martingale and finite signature transforms do not explode is the natural valuation cell of a signature SDE. The proofs are self-contained except for standard results from rough path theory, stochastic integration, and quadratic hedging, recalled in the appendices.

Suggested Citation

  • Akmal Xodarev, 2026. "On the Structural Foundations of Signature Volatility Models: Existence, Arbitrage, Completeness, and the Hedging-Error Decomposition," Papers 2605.17142, arXiv.org.
  • Handle: RePEc:arx:papers:2605.17142
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2605.17142
    File Function: Latest version
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2605.17142. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.