A Stochastic Volatility Swap Market Model

This paper derives a stochastic volatility extension of the Swap Market Model where a multiplicative stochastic factor equally affects all instantaneous forward swap rate volatilities. First, qualitative support for such extension is provided, and second, based on the fast fractional Fourier transform and a specific functional form of the instantaneous swap rate volatility a calibration methodology to European swaption prices is performed. EFM Classification: 550, 410