Testing Inequality Restrictions in Multifactor Asset-Pricing Models

with Adelina Barbalau and Jay Shanken, 2020, working paper. [Paper]. We develop an inequality constraints testing framework to assess the consistency of several multifactor models with the time-series and cross-sectional restrictions imposed by the intertemporal CAPM (ICAPM). Our tests of joint sign restrictions take into account the estimation error in the model parameters as well as the uncertainty arising from potential model misspecification. With a few exceptions, we cannot reject the null of consistency of the considered models with the ICAPM restrictions when using size and book-to-market, and size and momentum sorted portfolios as test
assets. As argued by Fama (1991), the ICAPM may be a “fishing license” after all.