mispriced

Mispriced is an adjective used to describe a price that deviates from an appropriate value based on available information and underlying fundamentals. In finance and markets, mispricing occurs when asset prices do not fully reflect intrinsic value, due to information asymmetries, market frictions, or behavioral biases. Such deviations can be temporary or persistent and may create opportunities for arbitrage, active management, or price discovery.

Causes include incomplete or misleading information, overreaction or underreaction to news, model risk in valuation, liquidity constraints, transaction costs, and structural features of markets such as fragmentation or short-selling constraints. For fixed-income and derivatives, mispricing can arise from incorrect assumptions about interest rates, credit risk, volatility, or correlation.

Examples include a stock trading below its fundamental value based on cash flows or assets; a bond trading with yields that imply different credit risk than indicated by fundamentals; options or other derivatives trading at implied prices that diverge from theoretical models due to changes in volatility or supply-demand imbalances.

Impact and implications are that mispricing can attract arbitrage traders or passive strategies, helping align prices with fundamentals over time and influencing risk premia. However, not all mispricings are easily exploitable; arbitrage has costs and risks, and some deviations reflect genuine risk, constraints, or market structure.

See also: market efficiency, arbitrage, price discovery.