The Efficacy of Conditional Cost of Carry Models in Pricing Oil Futures

This paper develops an empirical cost of carry model for pricing crude oil futures by introducing an exogenously conditioned convenience yield as well as stochastic volatility. The approach is tested using monthly prices of all light crude oil futures contracts traded on the New York Mercantile Exchange between 1985 and 2006. The results indicate that the model fits the data extremely well relative to the unconditional model. Though the paper focuses on oil, the approach can be used for any other consumption commodity with well-developed futures markets