A paragraph from the article Asset Mispricing:
One of the central doctrines of modern financial theory is that the price of a security should equal the present value of its cash flows. Recently, however, this paradigm has been challenged by evidence of asset prices that appear to diverge from their fundamental values, particularly during financial crises and major market events.
Or in the article Efficient Market Hypothesis, Andrew Lo puts the follwing statement:
A common explanation for departures from the EMH is that investors do not always react in proper proportion to new information. For example, in some cases investors may overreact to performance, selling stocks that have experienced recent losses or buying stocks that have enjoyed recent gains. Such overreaction tends to push prices beyond their ‘fair’ or ‘rational’ market value, only to have rational investors take the other side of the trades and bring prices back in line eventually.
In this context, I have 3 questions:
How is so-called "true price", "fair price" or "rational price" defined in the literature? Is that the same as the "fundamental price" of an asset? By saying "true/fair price" I understand the price which reflects an asset's intrinsic value/price. I do believe "true/fair/rational" price can be defined as the dicounted expected cash flow.
Does efficient market hypothesis (EMH) by Fama assume that current/spot price of an asset (e.g. stock) in the market equals to its "true" or "fundamental" price, and efficient markets do not allow mispricing?
What are causes for mispricing, i.e. divergence from "fair price"? I assume, information asymmetry, bubbles, etc.
Any answer and links/sources/papers will be highly appreciated.
EDIT Here I would like to provide some context for my question. Off the top of my head, I have the following theoretical definition (no practical implication possible) for "true price", even though this terminology does not exist in the literature:
Suppose we have an asset, and we do have some "time-machine", which allows us to move to future and see asset's future cash flow stream, which I assume is deterministic (I know that it is not realistic). Therefore, the discounted cash flow stream I would define as the "true price" of the asset. WHY? Because I am paying for it, what I am going to get in the future, like for fixed income securities (bond). Since in reality there is no time-machine, I want to understand how I can evaluate "true price" of an asset, as I defined above? One can say - "look at the market, and take the price"! But the market is not perfect, and the market merely has an expectation about future cash flow stream, and the information set which generates expectations dynamically changes over time.