Workshop Series: David Johnstone
Before information φ arrives, it must be logically uncertain whether the stock price conditioned on φ will be higher or lower than the current price. Any other inequality presents an obvious arbitrage opportunity. By assuming this minimal condition of efficient markets, it is shown under the mean-variance CAPM that information which makes the future value of a firm more certain, in the sense that its perceived covariance with the market is reduced towards zero, can lead to a higher expected return on that asset. A further connotation is that it is theoretically possible that the required return on the stock will necessarily fall after observing signal φ, or (in other circumstances) that it will necessarily rise. In general, information that allows better discrimination between firms leads some firms to have higher costs of capital and other firms to have lower costs of capital. Less obviously, better discrimination between firms can induce a higher average cost of capital across the market.
National Australia Bank Chair of Finance University of Sydney
David Johnstone is a PhD graduate from the University of Sydney. After completing his PhD, David spent one year at Lancaster University as a British Commonwealth Post-Doctoral Fellow and two years as a Visiting Assistant Professor in the School of Business at the University of California Berkeley.
David's research is in the statistical foundations of financial valuation and markets. He has published on topics concerning statistical inference and decision theory in prestigious international journals in the philosophy of science, statistics, decision theory, accounting and finance. Recent papers extended his work to include behavioural models of decision making, which underpin the emerging field of behavioural finance. David has completed major consulting tasks in the private and public sectors in Australia. A recent research project on infrastructure valuation for the purposes of tariff regulation formed the basis for a review of Australian regulatory practices by the Productivity Commission.