The Three-Dimensional Decomposition of Volatility Memory
Abstract
This paper develops a three-dimensional decomposition of volatility memory into orthogonal components of level, shape, and tempo. The framework unifies regime-switching, fractional-integration, and business-time approaches within a single canonical representation that identifies how each dimension governs persistence strength, long-memory form, and temporal speed. We establish conditions for existence, uniqueness, and ergodicity of this decomposition and show that all GARCH-type processes arise as special cases. Empirically, applications to SPY and EURUSD (2005--2024) reveal that volatility memory is state-dependent: regime and tempo gates dominate in equities, while fractional-memory gates prevail in foreign exchange. The unified tri-gate model jointly captures these effects. By formalizing volatility dynamics through a level--shape--tempo structure, the paper provides a coherent link between information flow, market activity, and the evolving memory of financial volatility.
Keywords
Cite
@article{arxiv.2512.02166,
title = {The Three-Dimensional Decomposition of Volatility Memory},
author = {Ziyao Wang and A. Alexandre Trindade and Svetlozar T. Rachev},
journal= {arXiv preprint arXiv:2512.02166},
year = {2025}
}