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Princeton BCF Faculty Spotlight December 07, 2021

Princeton BCF Faculty Spotlight – Wei Xiong

Wei XiongThis month we’re checking in with Professor Wei Xiong, who is the Trumbull-Adams Professor of Finance and Professor of Economics in the Department of Economics and Bendheim Center for Finance at Princeton University.

His research interests center on capital market imperfections, behavioral finance, the digital economy, and China’s financial system. He has received various awards, including the 2018 China Economics Prize, 2014 Inaugural Sun Yefang Financial Innovation Award, 2013 NASDAQ OMX Award by Western Finance Association, and 2012 Smith Breeden Award (first prize) by American Finance Association.

He received his Ph.D. in finance from Duke University in 2001, M.A. in physics from Columbia University in 1995, and a B.S. in physics from the University of Science and Technology of China in 1993.

He is Research Associate of the National Bureau of Economic Research and Co-Editor of Journal of Finance (the flagship journal of American Finance Association), as well as Academic Dean of School of Management and Economics, Chinese University of Hong Kong, Shenzhen. In addition, he is now a Visiting Professor and Director of Research in Faculty of Economics at the University of Cambridge.

 

Recent research and working papers:

  1. Matthew Baron, Emil Verner, and Wei Xiong (2021), Banking Crises without Panics [Online Appendix], Quarterly Journal of Economics 136, 51–113.
  2. Markus Brunnermeier, Michael Sockin, and Wei Xiong (2021), China’s Model of Managing the Financial System [Online Appendix], Review of Economic Studies, forthcoming.
  3. Zhuang Liu, Michael Sockin, and Wei Xiong (2020), Data Privacy and Consumer Vulnerability
  4. Long Chen, Yadong Huang, Shumiao Ouyang, and Wei Xiong (2021), The Data Privacy Paradox and Digital Demand
  5. Wei Xiong (2018), The Mandarin Model of Growth

 

Wei, you co-edited “The Handbook on China’s Financial System” How would you compare or contrast the US response to the pandemic vs. China – what has each done well? What could each do differently?

This handbook that I co-edited summarizes the current state of China’s financial system. Despite its massive size as the second-largest economy in the world and the dramatic market reforms, it went through in the past two decades, China’s financial system remains very different from western financial systems.

Interestingly, the responses of the U.S. and China to the covid-19 pandemic, both of which went far beyond their respective financial systems, were very much representative of how these two countries organize and manage their financial systems. By imposing heavy and draconic quarantine requirements on all of its residents, China had managed to quickly control the spread of the covid inside China even before the summer of 2020 and continued to impose rigid travel restrictions to prevent the virus from spreading again. These government restrictions come with a sharp trade-off—they burden individuals but are effective in controlling externalities induced by individual choices on others. The Chinese government has also shown its willingness to use a wide range of financial and economic policies to intervene in the financial system and the economy. These interventions are effective in mitigating market externalities, such as an outbreak of debt crises, but likely at the expense of distorting market incentives.

In contrast, the U.S. tends to take a more laissez-faire approach, leaving individuals to make the best choices for themselves not just in the financial system but even during the pandemic. The different experiences of these two countries motivate a re-examination of the long-lasting question regarding the optimal boundary between government interventions and free-market choices.

You’ve done some research on digital payments and the digital economy, including this paper on “The Data Privacy Paradox and Digital Demand” for Vox EU/CEPR. What do you see as other emerging areas of specialty or interest in econ/finance and what types of training and education will be required?

The recent advances in data and digital technologies have substantially expanded the scope of financial firms to offer financial services to a much wider range of consumers, including many previously underserved or even unserved individuals and small firms. The key forces often come from the unprecedented capacities of digital platforms to collect extensive data about behaviors and preferences of consumers in the ecosystems of these platforms. Economists have also started to recognize consumer data as a new driver for stimulating economic growth, especially given the nonrivalry nature of data—one’s use of some data does not affect others from using the same data. However, consumer data are more nuanced than knowledge in that consumer data may also reveal the privacy and personal weakness of individual consumers, thus exposing vulnerable consumers to predatory behaviors of profit-driven firms. How to take advantage of the powerful data technologies to provide better financial services and at the same sufficiently protect consumer privacy presents many challenges not only for data scientists to sharpen the technologies but also for economists to design suitable economic mechanisms and necessary market regulations to better apply the technologies in practice.

These new developments also create opportunities and challenges for economics and finance students with interests to pursue future careers in the booming digital economy. They need to not only master a set of new technical tools, such as machine learning methods and cryptographic technologies – but more important is that students need to understand how these new tools can be used to improve efficiency in practical financial or economic situations.

What advice do you have for students or early-career professionals who are considering the BCF MFIN degree?

The BCF MFIN program offers a unique combination of exceptional technical training in financial theories and mathematical modeling, with frontier applications of financial modeling in industries. The program builds nicely on the wide range of world-leading expertise in the faculty across the Princeton campus from the Department of Economics to the Department of Operations Researches and Financial Engineering to the Department of Computer Sciences.

You’ve been on a break from teaching this semester. What have you been working on?

Indeed, this is a very nice break that gives me more time to reflect on some of the elements of my key research agenda. I am particularly excited about developing a conceptual framework to think about both efficiencies and inefficiencies of China’s mixed economy. As I mentioned earlier, China has very different ways of managing its financial system. At an even more fundamental level, China has a very different economic structure. Through 40 years of highly successful market reforms, its economy has adopted many market-driven mechanisms, and free markets have prevailed in many sectors. At the same time, China has managed to strengthen some of its state firms and showed increasingly strong intentions to maintain the dominance of state firms in certain key sectors. While many economists have concluded that free markets have clear advantages over central planning, the recent successes of such a mixed economy becoming the second-largest economy in the world present many new questions that should keep me busy for a while.

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