The Associate Professor of Finance was awarded the funding for her five-year research programme on "Institutional Frictions in International Finance and Asset Pricing".
She joins Irem Tuna, Associate Professor of Accounting, and Paolo Surico, Associate Professor of Economics, who also secured ERC funding, totalling €2,735,835.
The ERC received more than 2,500 applications from the physical, social and life sciences across Europe. But fewer than 10% of applications were successful - highlighting Dr Pavlova's achievement.
She was awarded the grant after taking part in a competition for the ERC's Starting Independent Researchers scheme.
The ERC, which promotes investigator-driven frontier research, supports innovative and high-achieving scientists, scholars and engineers in a bid to encourage and stimulate scientific excellence.
Dr Pavlova said: "I am extremely grateful for this opportunity from the European Research Council. Prevailing models of financial markets ignore financial institutions, and this has not served us well in the recent crisis.
"My research funded by ERC seeks to model how financial institutions influence market prices and allocations. London Business School offers a vibrant research environment, and I am fortunate to benefit from fantastic colleagues, as well as from an established network of collaborators with which to conduct my research."