REASSESSING TECHNICAL ANALYSIS IN EMERGING MARKETS: A 20-YEAR STUDY OF MECHANICAL TRADING RULES AND MARKET EFFICIENCY ON THE LQ45 INDEX

Abstract

This study conducts an empirical re-evaluation of the effectiveness of technical analysis within the framework of the Efficient Market Hypothesis (EMH) in an emerging market setting. Utilizing a comprehensive two-decade daily dataset (2006–2025) of the Indonesian LQ45 Index, the research simulates a mechanical trading strategy based on 20-day and 50-day Exponential Moving Average (EMA) crossovers, contrasting its performance against a passive Buy-and-Hold (B&H) benchmark. To eliminate subjective bias and ensure methodological rigor, the analysis employs continuous log-returns and assumes a frictionless market. Statistical inference, performed using Welch's independent samples t-test, indicates no significant difference in raw returns between the active EMA strategy and the passive benchmark (p-value = 0.959), thereby strongly supporting the weak-form EMH. Notably, the study reveals a sustained negative equity risk premium over the two decades, with both equity strategies yielding lower returns (6.07% and 6.42%, respectively) than the 7.99% risk-free rate of 10-year government bonds. Despite underperforming in absolute returns, the EMA strategy demonstrates exceptional risk mitigation capabilities, drastically reducing total portfolio volatility from 23.65% to 15.39% and compressing downside deviation from 18.72% to 15.05%. Evaluated through the Modified Sharpe and Sortino ratios, these findings redefine the utility of moving averages: while technical analysis fails to maximize profit or generate anomalous returns, it functions as a highly effective portfolio insurance mechanism, capable of mitigating downside risk during market downturns.