Before revision: In this paper quasi-closed-form solutions are derived for the price of equity and VIX derivatives under the assumption that the underlying follows a 3/2 process with jumps in the index. The newly-found formulae allow for an empirical analysis to be performed. In the case of the pure-diffusion 3/2 model , the dynamics are rich enough to capture the observed upward-sloping implied-volatility skew in VIX options.
After revision: The paper demonstrates that a pure-diffusion 3/2 model , the dynamics are rich enough to capture the observed upward-sloping implied-volatility skew in VIX options.