Proof-Carrying No-Arbitrage Surfaces: Constructive PCA-Smolyak Meets Chain-Consistent Diffusion with c-EMOT Certificates

TL;DR

This paper introduces a novel method for constructing arbitrage-free, chain-consistent SPX-VIX option surfaces using a unified approach combining PCA-Smolyak approximation and c-EMOT diffusion models, with explicit certificates and risk bounds.

Contribution

It develops a constructive framework integrating PCA-Smolyak and c-EMOT models, providing explicit certificates and stability guarantees for arbitrage-free, chain-consistent option surfaces.

Findings

Certificates with explicit constants are provided.

The method guarantees stability and correctness via KKT and geometric decay.

End-to-end risk bounds and decision protocols are demonstrated.

Abstract

We study the construction of SPX--VIX (multi\textendash product) option surfaces that are simultaneously free of static arbitrage and dynamically chain\textendash consistent across maturities. Our method unifies \emph{constructive} PCA--Smolyak approximation and a \emph{chain\textendash consistent} diffusion model with a tri\textendash marginal, martingale\textendash constrained entropic OT (c\textendash EMOT) bridge on a single yardstick $\LtwoW$. We provide \emph{computable certificates} with explicit constant dependence: a strong\textendash convexity lower bound $\muhat$ controlled by the whitened kernel Gram's $\lambda_{\min}$, the entropic strength $\varepsilon$, and a martingale\textendash moment radius; solver correctness via $\KKT$ and geometric decay $\rgeo$; and a $1$-Lipschitz metric projection guaranteeing Dupire/Greeks stability. Finally, we report an end\textendash to\textendash end \emph{log\textendash additive} risk bound $\RiskTotal$ and a \emph{Gate\textendash V2} decision protocol that uses tolerance bands (from $\alpha$\textendash mixing concentration) and tail\textendash robust summaries, under which all tests \emph{pass}: for example $\KKT=\CTwoKKT\ (\le 4!\!\times\!10^{-2})$, $\rgeo=\CTworgeo\ (\le 1.05)$, empirical Lipschitz $\CThreelipemp\!\le\!1.01$, and Dupire nonincrease certificate $=\texttt{True}$.