Can investors of Chinese energy stocks benefit from diversification into commodity futures?

We attempt to evaluate the diversification potential of commodity futures for energy stocks in China. With a variety of copula functions and three risk-based dynamic measures, our results show that even though commodity futures are not helpful in improving the risk-adjusted returns of energy stocks, they can significantly reduce the volatilities and expected-shortfalls of the diversified portfolios. Such diversification benefits are much larger during large market downturns than during normal times. In particular, gold (copper) futures are the most (least) attractive in diversifying risks of energy stocks in most cases. The results also highlight that the non-linear dependence cannot be ignored when estimating the diversification benefits, and more various risk hedging strategies are expected for investors holding energy stocks, especially coal company stocks.