Risk premia reconsidered: Illiquidity and selection bias for stocks and corporate bonds in the pre-First World War period

Financial history is plagued by a visibility trap. Using the Brussels Stock Exchange (1850–1913), we demonstrate that asset illiquidity introduced selection bias, which systematically inflated historical risk premia. Applying a latent return model, we argue that correcting for this illiquidity decreases the equity and corporate bond risk premia and collapses the risk–return relationship. We show that the assets that were more exposed to selection bias underperformed in subsequent months. We identify two institutional drivers of this phenomenon: censored price lists curated by the financial media and the exchange’s policy to cease publishing bids and ask quotes in its official price lists from 1889 onwards.