In this paper we present a novel high-quality rendering system for Augmented Reality (AR). We study ray-tracing based rendering techniques in AR with the goal of achieving real-time performance and improving visual quality as well as visual coherence between real and virtual objects in a final composited image. A number of realistic and physically correct rendering effects are demonstrated, that have not been presented in real-time AR environments before. Examples are high-quality specular effects such as caustics, refraction, reflection, together with a depth of field effect and antialiasing. We present a new GPU implementation of photon mapping and its application for the calculation of caustics in environments where real and virtual objects are combined. The composited image is produced on-the-fly without the need of any preprocessing step. A main contribution of our work is the achievement of interactive rendering speed for high-quality ray-tracing algorithms in AR setups. Finally we performed an evaluation to study how users perceive visual quality and visual coherence with different realistic rendering effects. The results of our user study show that in 40.1% cases users mistakenly judged virtual objects as real ones. Moreover we show that high-quality rendering positively affects the perceived visual coherence.