What is a 'Price Creep'

Price creep describes the gradual and steady increase in the valuation or market price of an asset. Price creep refers to a situation in which either an individual or a group of individuals gradually lessen its reservations about paying higher prices for a given asset.

BREAKING DOWN 'Price Creep'

Everyday life provides commonplace examples of price creep in action. Rates charged at movie theaters or for a casual dinner out at a restaurant can be subject to price creep, especially in high-profile urban areas. Over time, customers become accustomed to paying higher prices for the good or service in question; as a result, prices at most business tend to keep rising year after year, in excess of the rate of inflation.

Price Creep in the Financial Markets

In the financial markets, price creep can be seen where investors gradually give greater valuation to a financial security. For example, at first, an investor may deem a given stock to be worth $10 per share. But after following the company for a while and watching the stock's price trend upward, the investor may eventually relent and decide that $15 per share is a fair price for the stock, even though that person initially deemed $10 to be a fair market value.

Price creep feeds into determining a portfolio's implementation shortfall: That being the difference between the money return on a notional or paper portfolio in which positions are established at the prevailing price when the decision to trade is made and the actual portfolio's return. In short, portfolio results don't always reflect desired outcomes at the point a decision is made to trade. In reality, it takes time to establish a position or reverse one. Most people recognize the explicit costs of managing a portfolio, mostly commissions, taxes, and fees. Other components of measuring implementation shortfall include delay costs (slippage) and missed trade opportunity costs. Both of these implicit costs occur because of the change in price over the course of a day when a trade doesn't execute immediately or when a trade is canceled.

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