Abstract We study the joint responses of commodity future prices and positions of various trader groups to changes of the CBOE Volatility Index (VIX) before and after the recent financial crisis. Financial traders reduced their net long positions during the crisis in response to market distress, whereas hedgers facilitated this by reducing their net short positions as prices fell. This “convective risk flow” induced by the greater distress of financial institutions led to a change in the allocation of risk with hedgers holding more risk than they did previously. The presence of such a risk flow confirms the market impact of financial traders conditional on trades they initiate.

ABSTRACT Many believe that compensation, misaligned from shareholders’ value due to managerial entrenchment, caused financial firms to take risks before the financial crisis of 2008. We argue that, even in a classical principal‐agent setting without entrenchment and with exogenous firm risk, riskier firms may offer higher total pay as compensation for the extra risk in equity stakes borne by risk‐averse managers. Using long lags of stock price risk to capture exogenous firm risk, we confirm our conjecture and show that riskier firms are also more productive and more likely to be held by institutional investors, who are most able to influence compensation.