Pricing of Swaptions in Affine Term Structures with Stochastic Volatility.

In an affine term structure framework with stochastic volatility, we derive the characteristic function of the log swap rate. Having the characteristic function, we employ the fast Fourier transform (FFT) to price swaptions. Using ten years of swap rates and swaption premiums, model parameters are estimated using a square-root unscented Kalman filter. We investigate the relationship between model premiums and interest rate factors, as well as between market premiums and interest factors, to conclude that long-dated swaptions are highly correlated to the shape of the curve. [ABSTRACT FROM AUTHOR]