Are there risk factors that are pervasive across major classes of corporate securities:

stocks, bonds, and options? We employ a novel econometric procedure that

relies on asset characteristics to estimate a conditional latent factor model. A common

risk factor structure prominently emerges across asset classes. Several common

factors explain a substantial amount of time-series variation of individual asset returns

across all three asset classes, and have sizable Sharpe ratios. Several of our factors

are highly correlated with some of asset-class-specific factors as well as macroeconomic

and financial variables. While a small set of common factors does not fully capture

the cross-section of average returns, imposing the factor structure is useful in practice,

especially in out-of-sample analysis. A mean-variance efficient portfolio that utilizes

asset characteristics achieves a high Sharpe ratio as different asset classes hedge each

other’s exposures to the common factors