Futures Pricing and Market Efficiency: A Deep Dive into the Cost of Carry Model

Date of Award

Spring 5-2026

Degree Name

Bachelor of Science (BS)

Advisor(s)

Kevin Mirabile

Abstract

The purpose of this paper is to examine the difference between theoretical and observed futures prices to identify an exploitable arbitrage opportunity and key drivers of mispricing. Variables of interest considered are futures asset category, time to maturity, and trading volume. Theoretical values are derived using the cost of carry model, which determines a "no arbitrage" futures price based on the underlying spot price, adjusted for all costs associated with holding the position. Costs of carry include financing, storage and insurance, and convenience yield. Using a sample of twenty-five futures contracts, results indicate moderate mispricing after accounting for transaction costs. Metals and agricultural products exhibit the largest deviations, followed by energy, equities, and foreign exchange. Regression analysis finds no statistically significant relationship between mispricing and either time to maturity or trading volume, suggesting that these factors do not systematically explain observed deviations. Instead, results point the importance of model assumptions, market supply and demand dynamics, and short selling restraints. Findings should be interpreted in the context of a limited sample size and assumptions surrounding key inputs such as financing costs and convenience yields. These findings contribute to existing literature by providing a cross-asset comparison of futures pricing under realistic trading conditions. This paper also contributes to understanding of limits to arbitrage by demonstrating that deviations from model pricing cannot be systematically explained by traditional liquidity or maturity. The study highlights the practical limitations of arbitrage strategies and suggests that observed mispricing is not easily exploitable in liquid futures markets.

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