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arXiv · 2609.20293

Beyond Rough Volatility: Decoupling Memory and Scaling via a Generalized Langevin Equation

Abstract

Borrowed from non-equilibrium statistical mechanics, the generalized Langevin equation (GLE) is imported as a framework for stochastic volatility to address the structural limitations of fractional Brownian motion (fBm), the standard engine of rough volatility. The fBm forces a single parameter to set two logically independent properties at once: how volatility scales and how it remembers. The GLE separates them using a memory kernel $K$, a potential $U$, and a noise covariance $C$. Memory becomes a measurable object, and an asymmetric potential supplies a lever on variance skew that the price-variance correlation cannot reach. Physical-measure tests on public datasets decisively reject two constrained corners of the class, a memoryless leverage effect and time-reversal symmetry, while the central rough scaling constraint is left identification-limited rather than refuted. The paper reports these limits honestly, and validation on industry-grade data remains a valuable direction. The risk-neutral construction and the joint SPX--VIX calibration will be developed in a companion paper.

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Andrey Itkin. 2026-07-31. Beyond Rough Volatility: Decoupling Memory and Scaling via a Generalized Langevin Equation. https://arxiv.org/abs/2609.20293

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