Information Diffusion, Word-of-mouth effects, and Mutual Funds Performance: A Mathematical Modelling Approach

Abstract: This paper puts forward that money managers and prospective investors exchange information and ideas about assets directly through word-of-mouth communication. This, in turn, affects the performance of the mutual funds and their respective managers. We develop a novel "Epi-Finance" model that connects epidemiology and finance to provide a solid explanation behind information transmission in the fund industry. By considering factors such as location, race, gender, and education concerning the equity market, several claims and connections are observed and modeled using an epidemic model. For example, based on location, a mutual fund manager is likelier to buy (or sell) a particular equity at any time if other managers in the {\epsilon}-neighborhoods({\epsilon}>0) are buying (or selling) that same equity. If the information about that particular equity spreads fast and the communication network is well connected, the same pattern shows up even when the fund managers are far apart. Also, a male fund manager is likelier to relate his investment style to other male managers, which is true otherwise. The same fashionable results are expected on race education, among others with special contextual differences.