What is a necessary condition for implementing the risk premium formula in market integration?

Implementing the risk premium formula in the context of market integration requires the condition of no barriers to capital mobility. When markets are integrated, capital can flow freely across borders without restrictions. This mobility allows investors to pursue opportunities based on prevailing risk premiums in different markets. If there are significant barriers, such as capital controls or regulatory restrictions, these could distort the pricing of risk and hinder the ability to accurately assess and implement the risk premium formula.

Without such barriers, investors can move their capital in response to risk assessments, thus enabling a more efficient allocation of resources based on relative risk. This condition is crucial because it ensures that differences in risk and return can be reflected in market prices across integrated markets. In contrast, other factors, while important in their own right, do not specifically address the flow of capital necessary for risk premium calculations in an integrated market environment.