Abstract
As financial institutions increasingly offer robo-advisors (RAs) as a service, the empirical evidence on their performance, particularly during market downturns, remains limited. We study the impact of using RAs on investment performance during the 2020 financial crisis caused by the COVID-19 global pandemic. We obtain daily portfolio and transaction data of investors on an online investment platform. Besides making investment decisions by themselves, investors can also leverage an RA system offered by the platform. We match RA users with other investors who did not use the RA with similar investor and portfolio characteristics before the market crash, then compare their portfolio returns after the crash. We find that RA users experienced significantly fewer losses during the market downturn, and this performance advantage came from the RA-managed assets (rather than assets managed by RA users themselves). We further show that the RA system adjusted its portfolios to hold less risky funds, whereas human investors stayed with their status quo and did not reduce the risk of their portfolios, which partly accounted for the performance discrepancy. Importantly, the RA’s superior performance was not simply a continuation of its performance in a normal market; in fact, we find RA users to have similar portfolio returns as non-RA investors during normal markets, and the benefits of RA's risk-reduction trading strategy only manifested during the financial crisis. Our work offers an empirical assessment of RAs’ performance under different market conditions and advances the understanding of algorithmic decision making in financial markets.
Original language | English (US) |
---|---|
Pages (from-to) | 3174-3192 |
Number of pages | 19 |
Journal | Production and Operations Management |
Volume | 32 |
Issue number | 10 |
DOIs | |
State | Published - Oct 2023 |
Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2023 The Authors. Production and Operations Management published by Wiley Periodicals LLC on behalf of Production and Operations Management Society.
Keywords
- adaptivity
- financial crisis
- financial services and operations
- robo-advisor
- status-quo bias