The cost of carry model was developed under the assumption of perfect markets and no-arbitrage arguments. However, capital markets are not perfect and arbitrage mechanism cannot be complete, particularly for the emerging market. To examine how well the cost of carry model works in imperfect market, this study proposes a fitness test of the cost of carry model and investigates pricing performance of the cost of carry model for the emerging markets-China cotton futures market. Empirical results indicate that the fitness test of the cost of carry model for the Chinese cotton futures contract is not perfect. Moreover, the pricing performance of the cost of carry model for the cotton futures for the year of 2006 is better than that for the tear of 2005. These results show that the cost of carry model cannot reflect the actual movement of the market at that time, but we can also implied from the results that the cost of carry model is more suitably applied to a market that developed for a relatively long time. Thus, when using this model to estimate the theoretical values of futures, investors should note the market imperfection for the market they participated. At the same time, at the end of the paper the factors which can affect the pricing of the futures greatly are also discussed briefly.
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