How does terms-of-trade behavior shape international financial integration in primary-commodity exporting economies?

• Let TOT be terms-of-trade and IFI be international financial integration.
• This paper examines how TOT volatility, trend, and shock persistence shape IFI.
• We utilize a panel of 55 primary-commodity exporting countries for 1980–2007.
• Finds that TOT trend has stronger impact on IFI compared to TOT volatility.
• Longer TOT shocks shift IFI towards equity assets and away from debt assets.

This paper presents empirical evidence suggesting that the volatility, trend-growth, and shock-duration of terms-of-trade (TOT) are important drivers of the degree and composition of international financial integration (IFI). Our results are based on a panel of 55 primary-commodity exporting countries during 1980–2007. The findings reveal that TOT trend-growth has larger impact on IFI compared to TOT volatility. Also, higher TOT volatility is robustly associated with greater cross-holdings of foreign assets and lower cross-holdings of foreign liabilities. Another notable finding is that longer duration of TOT shocks seems to shift IFI towards equity assets.