Time series modelling of global mean temperature for managerial decision-making

Abstract

Climate change has important implications for business and economic activity. Effective management of climate change impacts will depend on the availability of accurate and cost-effective forecasts. This paper uses univariate time series techniques to model the properties of a global mean temperature dataset in order to develop a parsimonious forecasting model for managerial decision-making over the short-term horizon. Although the model is estimated on global temperature data, the methodology could also be applied to temperature data at more localised levels. The statistical techniques include seasonal and non-seasonal unit root testing with and without structural breaks, as well as ARIMA and GARCH modelling. A forecasting evaluation shows that the chosen model performs well against rival models. The estimation results confirm the findings of a number of previous studies, namely that global mean temperatures increased significantly throughout the 20th century. The use of GARCH modelling also shows the presence of volatility clustering in the temperature data, and a positive association between volatility and global mean temperature.