  This article is part of a comprehensive research project on liquidity risk in
asset management, which can be divided into three dimensions. The first
dimension covers liability liquidity risk (or funding liquidity) modeling, the
second dimension focuses on asset liquidity risk (or market liquidity)
modeling, and the third dimension considers the asset-liability management of
the liquidity gap risk (or asset-liability matching). The purpose of this
research is to propose a methodological and practical framework in order to
perform liquidity stress testing programs, which comply with regulatory
guidelines (ESMA, 2019, 2020) and are useful for fund managers. The review of
the academic literature and professional research studies shows that there is a
lack of standardized and analytical models. The aim of this research project is
then to fill the gap with the goal of developing mathematical and statistical
approaches, and providing appropriate answers.
  In this second article focused on asset liquidity risk modeling, we propose a
market impact model to estimate transaction costs. After presenting a toy model
that helps to understand the main concepts of asset liquidity, we consider a
two-regime model, which is based on the power-law property of price impact.
Then, we define several asset liquidity measures such as liquidity cost,
liquidation ratio and shortfall or time to liquidation in order to assess the
different dimensions of asset liquidity. Finally, we apply this asset liquidity
framework to stocks and bonds and discuss the issues of calibrating the
transaction cost model.
