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.