Martingality in EFM Signature Volatility Models
Dimitri Sotnikov, Adeline Viot
Abstract
We establish a martingality criterion for the Exponentially Fading Memory (EFM) signature volatility model, extending the recent result of Abi Jaber, Gassiat, and Sotnikov (2026). In the proposed framework, the volatility process is given by a linear functional of the EFM signature of a time-augmented Brownian motion, which yields a globally well-behaved, fully non-Markovian volatility model admitting a stationary distribution. The stationary EFM signature volatility model is also covered by allowing for a random initial value of the signature. Moreover, the volatility process can be adjusted to the initial forward variance curve. For this model, excluding trivial cases, we prove that the price process is a true martingale if and only if the truncation order is odd and a sign condition involving the correlation parameter holds.
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