How can I write a great thesis on the topic of setting in stories? How does the setting of a story affect the character? What role does the setting of a story play?

Character, setting, and plot are intricately woven together in order to form a cohesive story.  Without a setting, a character would exist in a vacuum.  He or she wouldn't be able to affect anything or be affected by anything.  I don't want to make a blanket statement and say that the setting of a story is what always drives the plot, because that isn't always true; however, there are frequently times when the setting of a story drives the characters and the plot.  Let's take Lord of the Flies as an example.  I feel that a fairly strong case could be made that characters like Jack and Roger never descend to such moral lows without the plane crash and deserted island.  I don't believe that Timothy and Phillip from The Cay ever bond without the island that they are on.  1984's Winston Smith wouldn't be who he is if he wasn't surrounded by the totalitarian government of Oceania.  In each of those cases, the characters are shaped and driven by the setting of the story.  Setting and character are integral to each other.  
I feel that the above relationship of setting and character is more common, but there are times when the setting is nothing more than a backdrop for the events of the story.  Take Winnie-the-Pooh as an example.  The stories told about Pooh and his friends are stories about curiosity, wonder, friendship, and helping each other.  Those stories happen to take place in a forested area, but they could also happen in a jungle or an open field.  
In order to write your thesis, you need to choose how you feel about the importance of setting and character.  A thesis statement is a statement of opinion, and it's an opinion that you have to defend through the body of your paper.  The statement can't be a fact.  If it was a fact, there wouldn't be anything to debate. 
I recommend writing a two-part, either/or style thesis.  You will begin the thesis with the world "although" because it guarantees a dependent clause.  The first half of the thesis statement will be the part that you intend to disprove.  The second half of the statement is the part that you believe in.  For example, you could write a thesis that goes something like this: "Although it might seem that the setting of a story has minimal impact on characters, the setting of a story is actually one of the most important and integral parts to driving a plot forward and to characterizing each character." 
https://literarydevices.net/setting/