Asset class have common risk premia

Different asset classes will be driven by different risk premia, but asset classes will often have some commonality with these premia. Asset classes will differ by their weight to these premia.  

Diversification comes through mixing asset classes which then mixes the weight of premia. An expected change in risk premia will lead to a change in asset allocation. For macro traders, forecasting the macro factors that drive risk premia will drive relative value trades.

Nominal bonds will be comprised of an interest rate and inflation premium. There is also a term premium when comparing bonds with different durations. The inflation protection bonds will only be driven by the interest rate premium. Corporate bonds will have the risk premia for any nominal bond with an added credit risk premium. An emerging market bond will have the risk premium components of corporate bonds with the added EM premium that is unique to the bonds associated with developing economies.

Equity risks includes an interest rate and inflation premium, but most of the risk will be associated with the economic growth premium. Small cap stocks will have an added premium associated with liquidity.

The premia are associated with macro factors that can be measured:

• Economic growth premium - associated with surprises in GDP that will impact consumption risk.
• Interest rate premium - associated with surprises in real interest rates which affect present value calculations.
• Inflation premium - associated with surprise changes in inflation which will impact fixed cash flows.
• Credit premium - associated with the surprise risk of default which is associated with changes in firm valuation.
• Emerging market risk premium - associated with changing legal and political structure as well as changes in currencies. 
• Liquidity risk premium - associated with volatility and the spread between large and small cap equities.

There can be a deep narrative with any asset class but the story for why a given asset class should be held should start with describing how different macro factors affect risk premia.