We consider a time series model with autoregressive conditional heteroskedasticity that is subject to changes in regime. The regimes evolve according to a multistate latent Markov switching process with unknown transition probabilities, and it is the constant in the variance process of the innovations that is subject to regime shifts. The joint estimation of the latent process and all model parameters is performed within a Bayesian framework using the method of Markov Chain Monte Carlo simulation. One iteration of the sampler involves first a multi-move step to simulate the latent process out of its conditional distribution. The Gibbs sampler can then be used to simulate the parameters, in particular the transition probabilities, for which the full conditional posterior distribution is known. For most parameters, however, the full conditionals do not belong to any well-known family of distributions. The simulations are then based on the Metropolis-Hastings algorithm with carefully chosen proposal densities. We perform model selection with respect to the number of states and the number of autoregressive parameters in the variance process using Bayes factors and model likelihoods. To this aim, the model likelihood is estimated by combining the candidate's formula with importance sampling. The usefulness of the sampler is demonstrated by applying it to the dataset previously used by Hamilton and Susmel who investigated models with switching autoregressive conditional heteroskedasticity using maximum likelihood methods. The paper concludes with some issues related to maximum likelihood methods, to classical model selection, and to potential straightforward extensions of the model presented here.
