What is fiction? Well-crafted lies? Imagination run wild? Real-life condensed and amplified? Social or political commentary? Escape from reality?
I think it can be any or all of these, and sometimes all at once. My personal definition is that fiction is a "false truth". The story is false - either entirely made up or exaggerated in some way - but there also has to be some truth to it.
One of my favorite books of the last few years was One Second After, by William R Forstchen. Part of what made this book so fascinating was that it was based on a very real threat to the US: an electromagnetic pulse or EMP. In a nut shell, an EMP kills anything and everything electronic, sending the victim country back to the dark ages with no transportation, no power, and very few means of communicating. The characters in the story were imaginary, but their reactions to the threat and behaviors after it occurred were true. The story is made-up (false) but it's based on reality (truth).
But Megan, you write fantasy! It's all made up, its only point is to provide an escape from reality, so it can't be real and it can't be true.
Just because fantasy isn't real doesn't mean it isn't true. And just because it isn't real doesn't mean that there's no value in it except as an escape. Every great fantasy has truth and meaning.
“Aristotle went so far as to say that a 'probable impossibility' made a better story than an 'improbable possibility,' meaning that a skillful author can sell us glass mountains, UFOs, and hobbits, whereas a less skilled writer may not be able to convince us that Mary Lou has a crush on Sam.”~ Writing Fiction, by Janet Burroway
The characters of the story might belong to a fictional race of elves, trolls, werewolves, vampires, hobbits, orcs, goblins, angels, demons...you get the idea...but their personalities have to be based on something or someone we know or can relate to in some way, even the bad guys. Frodo was the boy next door, forced to step up to a responsibility he didn't really want and wasn't really ready for. And at the most basic level, Sauron was an evil dictator, living far away, that wanted to take over the world. Remind you of anyone?
The key here is that though they weren't human, these characters had personalities, backgrounds, quirks, and pet peeves that defined them and were true to their stories.
Then there's the setting: depending on the subgenre, the setting can be both real and true, or just true. My novel is set in the mountains of Colorado. I've been there. It's real. Promise.
Oh, you want a published example? Look at the Sookie Stackhouse series (or True Blood for those that watch the show but haven't read the books) – Sookie lives in modern day Louisiana, it just so happens that the vampires have come out of the coffin and revealed their existence. So long as Charlaine Harris maintains the rules of her world (vampires allergic to silver, for example), the world she's created feels real.
However, even an epic fantasy adventure can take place on a non-Earth world and feel as real as the suburban neighborhood I live in, so long as the author follows his own rules and stays true to the characters. If the planet has a purple sky, it needs to stay that way (unless there's some kind of catastrophic event that changes the color of the sky for a reason...but I digress). If the protagonist is the daughter of a Duke living in a castle, she probably shouldn't be a weapons expert or inadvertently break the rules of etiquette.
Fantasy is definitely false, but it can also be true too.