We propose an information-based theory to explain time variation in liquidity and link it to a variety of patterns in asset markets. In "normal times," the market is fully liquid and gains from trade are realized immediately. However, the equilibrium also involves periods during which liquidity...

We develop a rational theory of liquidity sentiments in which the market outcome in any given period depends on agents' expectations about market conditions in future periods. Our theory is based on the interaction between adverse selection and resale considerations giving rise to an...