AbstractTheory predicts a positive relationship between biodiversity and stability in ecosystem properties, while diversity is expected to have a negative impact on stability at the species level. We used virtual experiments based on a dynamic simulation model to test for the diversity–stability relationship and its underlying mechanisms in Central European forests. First our results show that variability in productivity between stands differing in species composition decreases as species richness and functional diversity increase. Second we show temporal stability increases with increasing diversity due to compensatory dynamics across species, supporting the biodiversity insurance hypothesis. We demonstrate that this pattern is mainly driven by the asynchrony of species responses to small disturbances rather than to environmental fluctuations, and is only weakly affected by the net biodiversity effect on productivity. Furthermore, our results suggest that compensatory dynamics between species may enhance ecosystem stability through an optimisation of canopy occupancy by coexisting species.