Gaussian volatility-surface models cannot stay inside the static no-arbitrage set: at an active constraint they exit with probability 1/2, so exact models must be reflected, tangent, or confined to parameterized arbitrage-free manifolds.
A General Theory of Paths: Signatures, Jump Lifts, and Expected Signatures of Self-Exciting Processes
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abstract
This paper develops a path-first theory using the signature as a universal coordinate for deterministic paths, rough paths, jump streams, and path-valued random variables. Geometricity is presented as a first-order algebraic property with second-order obstructions: a bracket for non-geometric lifts, and a covariance when averaging random paths. This framework links the shuffle identity, Marcus-Ito distinction, expected signatures, signature kernels, and free nilpotent group geometry. We offer four main contributions. (1) The Geometricity-Defect Theorem identifies quadratic covariation and coordinate covariance as the canonical failures of shuffle multiplicativity. (2) The Hopf Square proves that for pure-jump finite-variation paths, the forward Ito signature equals the iterated-sums signature, while the Marcus signature is Hoffman's exponential image of it. (3) Affine and exponential Hawkes processes are shown to admit finite-dimensional linear closures for truncated expected signatures after state-weight augmentation. For scalar Hawkes clocks, this allows explicit identification of baseline, excitation, and decay parameters. (4) An antisymmetric second-level cross-area is proved to detect two-channel Hawkes excitation direction to first order. Secondary results cover kernel-MMD decompositions, free nilpotent truncations, stable-law thresholds, heavy-tail normalizations, and a large-deviation principle. All identities and formulas are validated by a reproducibility script.
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The Mathematics of Volatility Surfaces
Gaussian volatility-surface models cannot stay inside the static no-arbitrage set: at an active constraint they exit with probability 1/2, so exact models must be reflected, tangent, or confined to parameterized arbitrage-free manifolds.