Are there risk factors that are pervasive across all major classes of corporate securities, including stocks, bonds, and options? We employ a novel procedure that builds

on the ability of asset characteristics to capture the dynamics of asset returns to estimate a conditional latent factor model. A common risk factor structure prominently

emerges across asset classes. The first factor that corresponds to the dominant principal component of the joint cross section significantly explains a substantial component

of time-series variation of individual asset returns across all three asset classes, has a

Sharpe ratio over twice that of the stock market. Other common factors that are less

pervasive, i.e. describe a smaller portion of common variation in returns over time.

Some of the common factors highly correlated with some of asset-class-specific factors

as well as several macroeconomic and financial variables. However, we also document

that the factor structure does not fully capture the cross-section of average returns.

Portfolios that have zero loadings on the top latent risk factors can earn substantial

Sharpe ratios, with different asset classes hedging each other’s exposures to the common

factors.