Cycles of market stability and instability due to endogenous use of technical trading rules

A model is examined in which traders endogenously select from available information sources in order to maximize expected profits. The information options include fundamentals and a technical trading rule. The trading rule earns profits for the users as long as the demand of the fundamental traders sets the market price. Under certain model parameters, success by the trading rule increases its popularity. Excessive popularity of the trading rule destabilizes the market, causing a price bubble to develop. The bubble's collapse reduces the trading rule's popularity and returns the market to stability as the fundamental traders again set the price.