
How lazy trading explains FX market puzzles
Not all market participants respond to changing conditions instantaneously, not even in the FX market. Private investors in particular can take a long while to adapt to changes in global interest rate conditions and even institutional investors may be constrained by rules and lengthy process. A theoretical paper shows that delayed trading goes a long way in explaining many empirical puzzles in foreign exchange markets, i.e. deviations from the rational market equilibrium, such as the delayed overshooting puzzle or the forward discount puzzle. Understanding these delays and their effects offers profit opportunities for flexible information-efficient traders.